Mining sees M&A action again; homework now will be profitable for investors

It’s been a long winter for the mining sector, but stock prices have been predicting a much brighter 2017. And RMB’s London-based mining specialist Judith Mosely is getting ready for a hectic year as the long expected increase in corporate action picks up again. In this insightful interview we touched on why junior miners will be starting to feel optimistic and why the Sibanye mega-deal is only the first in a series of transactions. Time for investors to do their homework and bank the profit as value gets unlock through mergers and takeovers. – Alec Hogg   

This special podcast is brought to you by RMB and I’m with Judith Mosely here in London. It’s a bit of a gloomy day out there, Judith, but we’re going to talk about something that’s brightening up, the mining environment, which hopefully, seems to have bottomed.

Absolutely, thanks very much. Yes, I think we’re starting 2017 in a much more positive environment than we were at the beginning of last year. Certainly, in terms of the equity markets, we’re starting to see an uptick. Although it might take some time, it means that the bank side of things will start moving now that the equity markets are moving. The environment is starting to look a lot more positive than 12-24 months ago where it was very difficult to see where the mining industry was going to start moving. I’m fairly positive about what we’re going to see in 2017.

This time of the year is when the Mining Indaba is held, so it’s often a good benchmark to look at the way the mining industry is going. I remember two years ago there was doom and gloom. Last year a little bit of an uptick, have we progressed still further?

Yes, I think we’re still at the beginnings of that. We mustn’t get ourselves too carried away about where the industry is now though, but I think the signs are positive. Certainly the Indaba is a good time to take stock of the industry generally to see how people are approaching the year. Looking back at the end of last year to mines and money here in London, the kinds of conversations that we were having, I expect those to continue at the Indaba. This year it’s much less about survival, rationalisation and the disposal of assets, and much more about how do we build this business, how do we take it forward, how do we finance it. There’s a much more positive view from a CEO point of view in terms of where the industry is going, and I would expect the Indaba to reinforce my expectation that that’s where the industry is heading.

Certainly, the companies have currency again if you look at the performance of the FTSE 100 last year, number one Anglo American, Glencore was in the top five as well with some spectacular shareholder returns.

Yes, we’ve seen a great uptake in some of the stocks and I think that is a symptom of the hard work that many of those mining companies have done. There’s been a huge amount of focus on cost cutting, rationalisation, and on the disposal of non-core assets. Those businesses are now very well-positioned from an upturn in the commodity price and can really move forward positively. What I see as well is that the deconsolidation and sale of non-core assets is also giving some lifeblood to the broader industry which means that we’re going to see more M&A in Africa.

On the other hand, I think it is fair to say that because there has been this lack of investment into mining because of the equity markets being closed (and particularly a lack of investment into early stage exploration projects), that it’s going to be a long while before we see a really strong pipeline coming through. Until we see a new pipeline of projects coming through there’s going to be a constraint in terms of opportunities in the market, both for the corporates and the banking side. What we’re witnessing now is the beginnings of a recovery and certainly equity markets are looking much more positive than they were, but there’s still a long way to go.

It’s an interesting sector in that it does replicate what happens in other parts of the economy. The big guys get busy first and only then do the juniors pick up. Talking about the big guys first, we’ve seen from South Africa, Sibanye, with this run that it’s making, it’s still water at the Palladium Mine in Canada, are you expecting other megadeals like that to punctuate the 2017 landscape?

Well, I think that’s a very interesting question and I suppose sitting on this side of the world, outside South Africa, while obviously working for a South African company and focusing on the African continent, a lot of the activity that we see coming into Africa, has not historically been driven by the South African mining companies. They’ve been very focused on their home territory and in fact, most of the activity we’ve seen coming into South Africa has been from Canadians, Australians, or European listed companies. I expect that to continue. I’m not yet seeing a huge amount of appetite for the broader African continent from the South African players.

We’d certainly love to see that and we think there are good opportunities. We are engaging actively with our clients to ensure that, should Africa be on the agenda, we can assist them. It would obviously be a great opportunity if we can take them into Africa, and we think there are decent opportunities out there. We must however recognise a lot of that investment is coming from overseas, which is partly why I’m sitting here in London, to capture that market and ensure that we’re talking to all players who are investing in Africa.

I had a fascinating discussion with the Chairman and Founder of Vedanta in Davos last week and he’s put hundreds of millions of Dollars into a mine in South Africa, the Gamsberg Mine, are you seeing more of those non-traditional investors now starting to get attracted by the continent?

Very much so. I think what we are starting to see is a new order. I think the investors into Africa recognise some of the challenges that the broader continent presents. They realise that while the geology can be fantastic with many great opportunities, there are also some challenges to deal with. Some of the leaner companies like Vedanta are for example able to move perhaps a little faster than the ‘old regime’ that have to some extent struggled with Africa and have been dealing with very big projects that are very difficult to execute, which are very politically embroiled. I think that it’s the trading companies that have that kind of mentality to do the deal to make something work, that can work quite well for them on the continent, so we are seeing a little bit of a regime shift there.

Are juniors getting more interested?

I think juniors have always been interested and they are a critical part of the lifeblood of the mining industry. They’re great at the exploration and development stage, or pre-development stage. Not always the right companies to take projects forward, but they’re an absolutely essential part of the food chain for mining and there’s always a huge amount of innovation, entrepreneurship and so on at that end of the spectrum.

What we really need to see is the markets opening up for those companies. The bank market generally is starting to move away from the very early stages, greenfield, junior mining project financing and more towards supporting established operators and that’s not good news from an explorer’s point of view.

The equity markets are also still quite hostile to that end of the market, so there are still many challenges, and raising finance for those companies is still very, very difficult. Again this is why I say 2017’s looking much more positive. There are still challenges for the industry, but it’s not healthy across the whole spectrum. Finance is not available equally across that spectrum to all partners or parties and there has been a flight to quality. Banks and financiers are now even more interested in the operators and the multi-national companies than they are in the junior end of the market.

At least the big guys can get money, which they probably couldn’t a couple of years ago.

Yes, they certainly can and I think, although the traditional mining finance markets, the banks, have actually to some extent contracted. There are fewer banks like us now around that are still much focused on resources. There is a growth on alternative sources of financing as well, so royalties and streaming, for example, are starting to rise. The role of trading companies, the role of off-take and so on – those are broadening the suite of financing sources that companies can look at. But yes, it’s fair to say that if you’re a quality player, and you have well-established assets, then you’re going to have banks running after you and you can raise financing very attractively.

Just dwelling a little on Africa, being a continent full of developing countries, where politics is terribly important, geopolitics is important all around the world, but even more so in Africa, the recent developments, Ghana where the opposition vacated office with no problem, even South Africa where we had three cities where there was a change in governance and no friction, and most recently, in Gambia where a president for life was threatened by the other West African countries that if he didn’t leave, they would force him to, that must be (longer-term anyway), very positive.

Yes, I think so and when we’re looking at opportunities in Africa, it is a hugely diverse set of countries, so there’s no one size fits all. Every country needs to be looked at on its own merits, both in terms of the projects that we look at, and in terms of the environment, including the political environment. So we look very carefully when we are engaging with a company at the environment in which they’re operating in. How stable that political situation is, is obviously something we also look at in quite a lot of detail. From a project point of view, one of the key things we need to consider is how stable the cash flow that’s going to be generated from that project over its life is going to be because that is what we’re relying on to get repaid.

It’s not just a question of looking at where that country is now, where is the mining, the legal framework; it’s what happens if that changes? That’s one of the most challenging things that we have to deal with as a bank and as the company, is to deal with potential changes along the road, which you’d not anticipate. I suppose it means that we do tend to focus quite hard on developing business in the countries where we’re most active, where we have a business and people on the ground, a broad network of contacts and where we have a close relationship with key decision-makers so we know where things are going and where things are heading. I think that’s quite important, but you know it is also fair to say that resources don’t always sit in the countries where we are present.

That’s one of the challenges, really looking at the best quality projects, taking into account the fact that things could potentially change and making sure that the analysis that we do accommodates the possibility for that. We look at the most competitive projects and those that are sitting in the lowest quartile in terms of the costs, so that even if the market were to drop or if say, the royalty or the taxation regime was to change, that project would still be able to keep its head above water. That’s obviously quite critical in terms of debt servicing.

What are the most attractive sub-sectors of the mining industry right now within Africa?

I suppose from our point of view we see two particularly strong sectors: one gold and the other copper. Gold remains and has remained quite active even during the challenges of the last few years, partly because gold projects are relatively easier to get off the ground than big infrastructure-related projects.  We would therefore see gold in West Africa as being one of the key areas of focus. We don’t anticipate that many deals related to new greenfield projects in 2017, but I think there will be activity around M&A and further consolidation in West Africa.

There’s a very active copper industry in Africa, particularly in Zambia and the DRC. A lot of that is held in a relatively small number of hands, but there are still assets out there that could offer the potential for consolidation. It doesn’t mean that we’re exclusively looking at those two commodities or those geographies in Africa, but they’re the ones where we have most focus at the moment.

The central African region of Zambia, the DRC, and then West Africa, are those the most appealing areas or the most appealing projects that are coming to you?

That’s where we see most of the activity at the moment. Clearly, there are opportunities that come to us across the continent, but I think it’s important to be quite focused as well. I don’t think we want to be all things to all people. We really do want to be able to get to know our clients or targets very closely. The people are as important as the resources. If you have the wrong people in charge of a project, the project’s not going to work, so for us, it’s important to get to know our clients and our targets.

Any area that you would avoid, any countries you would avoid?

Yes, we tend to try to find solutions as opposed to saying “absolute no go”. There are some countries that are very, very challenging though. I think Zimbabwe (no surprise), we wouldn’t be able to do anything there, Eritrea, and Central African Republic are examples, but that still leaves us with plenty of scope in Africa which we certainly feel very comfortable working with.

Judith, if you were to sum up the outlook for mining in Africa in 2017?

I’m starting 2017 feeling positive. I think it’s going to require us all to put our thinking hats on: to think hard about how we can make sense of where the industry is going with the lack of new projects coming in I think it’s also going to be an M&A led year. We are going to be looking at diversified sources of financing  – not just bank debt, but capital markets. I hope to see us being busier than last year. I’m starting the year feeling very positive and I’m looking forward to the Indaba to see, not just the clients whom I know already, but I’m really hoping to see if there are some new projects and new clients out there that we can track down.

Judith Mosely is with RMB and this special podcast was brought to you by RMB.