Alec Hogg is at the Mining Indaba in Cape Town and global Mining Leader for Deloitte Phil Hopwood, who came all the way from Canada to attend the Indaba, took a few minutes to speak with him.
It’s obviously quite a big function or quite a big event for you to come all the way from Canada is it?
That’s right and thanks Alec for having me on your show today. Yes and now – it’s a long way to come here but this is one of the most important conferences in the mining calendar every year.
Yes, I see they call it ‘The World’s Largest Mining Investment Conference.’ I guess investors get together with people who need the money and services companies, like yours need to be present.
That’s right. There’s actually three main conferences I go to every year, so there’s this one, there’s PDAC, the big Canadian ones, which actually has around twenty to thirty thousand people go to that one, though that is more of an explorers duly miners conference, but I do think that there’s a lot of investing there as well by the way. Then there’s Diggers and Dealers, which is in August, in Australia.
So this is one of the big three?
Yes.
Are you finding that there’s enough support from the South African Government? Do you have officials here? Do they engage with you?
Lots of Government people are here but I’ve got to say that this is one of my favourite conferences. You have the interaction here with Government and you have the private sector here, you have the investors here, and it’s actually in a great location as well. This is always a great opportunity to gauge investor confidence, especially in this part of the world, in Africa.
How are you seeing it?
Well that’s the big thing. That is one of the reasons why I am actually here. As you know, we release our ‘track in the trench’ report every year. We’ve just released our latest one, this is our seventh, about three weeks ago, so we’re actually saying, at the moment, in terms of confidence. Confidence is probably a little bit on the wane right now, though there are a lot of signs in the market that maybe, in 2015 is when the confidence starts to come back up again.
Why would that be?
For a few areas here, so one is in terms of (for example) investor confidence. The junior miners, the investment junior miners is really at an all-time low right now. There is just no doubt about that and when you see, for example, the number of IPL’s in the mining sector, you can look at the performance of the mining shares. However, we really do feel that perhaps we’re actually at the end of the cycle. One of the indicators you can look for here is you look for the non-linear indicators (so to speak). What I mean by that is when you see mining companies becoming medical marijuana companies, perhaps that’s an indicator.
If you remember the Dotcom boom, you had companies that were mining companies being backed into e-business companies, and that was an indicator that something was happening then. I came up with those types of things.
So it is that the value of the assets are so low that you’ll just flip the listing into anything that looks hot, at the moment?
Well, there is no doubt, there is some companies whose value is actually extremely low right now, but there’s actually great value in the market at the same time. There’s some great assets and we’re also at a time, right now, of supply constraints. You can look at things like, for example, copper prices that they’ve dropped quite a lot in the last few weeks, to about $5 500.00/ton. However, by the way, a few years ago, people would have taken that as ‘no problem’ at all, as a price. For the rest of the supply constraints in that market right now, we are looking at a supply shortfall in the copper market. We are still in the position, for example, with zinc, where there are supply shortfalls. This is, like I say, great value in some of the companies right now.
If we’re close to the bottom then presumably it’s a time when clever money or smart money is starting to pick up projects. Do you see any investors here, really smart investors that maybe haven’t been around for a while, who are now seeing opportunities and bargains?
There’s a lot of investors who are in the market. I was quite interested to see, for example, the performance here around private equity, so there’s a lot of money around, in the market, in private equity such as the sovereign wealth funds. There’s companies like Icsti, who’ve put together very significant financial backing behind them. They are starting to move in the market right now. We are predicting that there will be an upturn in MNA this year, especially in the junior sector, and we’re starting to see some of those moves right now.
The people that you consult to, when you go a little bit higher than the juniors, are they looking at juniors as a takeout? I think you’ve worked with BHP Billiton Xstrata; well they’ve gone now, but that kind of company? Are they seeing juicy opportunities or do they have their hands full with what they’ve got?
Absolutely, yes, there is value in this market and those companies are actually poised, in terms of growth. They are always looking at potential investments. Don’t forget that we are actually in an industry where we do deal with finite resources, gold, silver, and some of these commodities. When you mine them out then you have to actually, find new assets. Where do you find those new assets? Well, traditionally people have actually explored by themselves but really, they’ve outsourced that to the junior end of the market. It’s the juniors where you actually have to pick up the exploration and you have to pick up their assets. Absolutely, yes, so they are poised because a lot of the large companies, they don’t really have large exploration arms themselves. They depend on the junior explorers.
What were the other major trends to come out of your research?
There’s several trends. Quite often, what we see with the trends is they’re almost like story arcs, so it wasn’t that long ago, for example, that we were looking at capital projects, in terms of if you went back five or six years. We think there should be more capital projects, we said at the time, and then we started looking at the costs that were in those capital projects, and you had to manage those better than you are actually managing them. Then we started to say, ‘well perhaps these capital projects, if they are not managed properly, they’re going to be large over-runs’, and we talked about the impairments around them and now we’re in a cycle where we’re saying, ‘hold on a second, not enough capital projects that are actually being developed right now’. We’re not investing enough in capital projects, so that is a real trend.
That’s a good sign, longer term, but of course, it is also a sign of some distress at the moment.
Well it is but it is also a sign that in certain key commodities, and you can see those commodities right now, we will have supply constraints in those commodities going forward, copper being one of them. In fact, some of the base metal prices now that are slightly higher than they were a few years ago, are as a direct result of the fact that there were supply constraints around capital projects in say, base metals several years ago. People weren’t investing then and they are reaping some of the rewards of that now.
Sitting in North America and looking at the African Continent, is there much interest in the investment opportunities or investment appeal here?
There is and one of the interesting areas that I see where the investment opportunities and the interested partners that lie, is in Government and this is one of the trends that we really talk about a lot in this year’s report. It’s really the partnerships between Governments and the private sector, so Governments have realised that perhaps mining taxes, and by the way, the mining sector does pay its fair share of taxes I have to say, you would have seen some of the big transparency reports around that, in the mines with the larger companies. So, the Governments where mining is a big part of their industry they realise that what they have to do is to really, attract that investment and how do they attract that investment? It’s not around driving people out and trying to extract the highest amount of tax. It is how do I bring employment into my country? How do I bring investment into my country?
Not everybody is getting that message, if you look at Zambia for instance, is a definite outlier in that respect.
Part of the issue of that, I would suggest, is around communication and its understanding, so does the private sector or do some of the mining companies themselves, really understand what drives Government, in terms of what it’s looking for and does the Government side, Federal, Provincial, or State or whatever variety of Government you’re actually talking about here. Do they really understand the mining company? What drives their investment cycles?
Mining companies, they don’t mind paying tax. They don’t mind the regulatory and compliance environments enforced by the countries in which they operate but what they’re looking for is certainty. Certainty with legislation because they’re looking at investment cycles of say 20/25/30 years sometimes.
So don’t go and change the laws once you’ve made them.
Exactly right, the last thing that they want is for someone to come along after five years, of you developing your mine and say, ‘right, we want to change the entire taxation regime here and now we want to introduce a whole new royalty regime’. That just blows all your figures out of the water.
The problem is, is you are already in. If it’s a 25-year investment, you’ve made the investment. What do your clients do in a place like Zambia?
What actually happens is, so you say ‘they’re in it’ but maybe they haven’t actually developed the mine there. They’re still going through the feasibility studies, and some of those studies can take a long time, depending on the size of the asset, so what the mining companies will do is they will actually put the potential project on ice, for a number of years, and they’ll move their investment elsewhere. To a jurisdiction that perhaps understands mining a little bit better, and maybe proactive around in terms of attracting investment.
Phil Hopwood is the global mining leader at Deloitte.
