According to Nedbank, there are still some good value opportunities in the SA mining sector. Despite that, they do expect it to be a fairly tough year. Mark Tyler, the Senior Investment Banker at Nedbank Capital based in London joined Alec Hogg in the CNBC studio to discuss those opportunities, and challenges.
At the Mining Indaba last week opportunism appeared to reign; the opportunity to buy things cheaply was the theme.
I think that’s true. Many things are cheap and they’re cheap for good reasons – because they don’t make much sense. For example, iron ore projects in West Africa are currently very difficult to do. It’s an infrastructure play and I think the Australians have put them all out of business. There was a lot of optimism around gold. People rushed into gold when they possibly shouldn’t have done it and that’s a little bit tough at the moment, but there are still lots of opportunities. We think diamonds are a good story. There are a number of good diamond projects out there. Fertiliser is a very good story. There is a resurgence in African agriculture as there is in the world, and a number of projects on the continent are looking to produce fertiliser products, so those are good opportunities. I think that for good fundamentals, gold is always going to be a good story.
Lloyd Burrell spoke about mining gold when the old-timers were in South Africa, in Pilgrim’s Rest, Sabie, and those areas. When you look at something like that as a banker, do you get excited by those opportunities?
I think there are many Greenfields opportunities in West Africa that are possibly just on loan and that’s the attraction, but everyone has been around Pilgrim’s Rest for a number of years. People have been doing research projects to find additional gold in the area for many years and it’s a good story, but it’s not that good. Somewhere in West Africa, these are new jurisdictions. They’re almost new fields and I think it more likely that there’ll be opportunities there than domestically.
A big story as far as the Mining Indaba was concerned, was Robert Friedland about whom Steve jobs said ‘don’t trust this man,’ yet he has attracted a lot of money for The Ivanhoe Project in Limpopo Province. Another big platinum project is in the Waterberg. What’s your take on those two?
Robert Friedland is Robert Friedland. People always say ‘don’t trust him’ but he’s had some great discoveries. Voisey’s Bay was a magnificent nickel deposit in Canada. Oyu Tolgoi in Mongolia is a magnificent deposit that Rio bought out there. The Plat Reef is potentially a game changer. If all of what he says is true, it’s a big deposit. It’s flat. It’s easy to mine. You can mine it vial bulk mining as opposed to highly labour intensive mining. hat makes a good story. Whether you can deliver the grades, we’d still have to see but those big, flat projects are attractive from a simple safety and ease of mining opportunity.
That Waterberg Project, for which they’ve raised $500m from some of the big names in global finance; is that one that you would give credibility to?
Yes, I think Robert’s been doing his thing for longer than they have. I’ve listened to the story I’ve chatted to the guys and it’s the same story. It’s a big, flat deposit and if it comes off, it will be good but we haven’t looked at it in any great detail. I think there’s still some work to be done on that.
This positive story, overall; are we seeing investors responding to this, whether from private equity or from the markets overall?
Yes, I think there’s enough money available to build a mine. I think there’s a bunch of South African banks and African banks that are interested in Africa, so there’s a lot of them looking for opportunities. In fact, it’s very competitive. There are South African banks, Nigerian banks, Eco bank, and many European banks. In addition, debt finance is readily available for African projects. The equity to build a mine: anecdotal sums say there’s about $2bn sitting in private equity funds, really looking for opportunities in Africa to build mines, but you need to have done a feasibility study. You have to be ready to construct, so I think there are good opportunities. If you have a project that stacks up in this environment, I think the chances are that you’ll be funded quite easily. If you’re looking for exploration funding, I think it’s currently a bit tougher. That’s always been working off appreciation of stock prices and that’s not happening at the moment, so that’s a bit tough. However, if you’ve done some work in the past, you stand a good chance.
Are you seeing more investors of the calibre of City of London ‘Queen’ Robin Saunders, that is, those involved in private equity but perhaps first time dabblers in mining, coming to the party?
Many people have raised private equity and have funds. We know that many of them are ex-industry or ex-bankers who have been able to put money together and the chase for yield from the American investment funds are such that they’ll put money behind a good management team to make investments. If you have a good team, people will put money behind you. The trick is to find investments where other people aren’t busy because it’s a competitive environment.
So, if you have a project and it’s a good project, you’ll get the backing but don’t go and do some Greenfields exploration.
Yes, I think that’s true. If you come in with a bizarre story or something that doesn’t make sense (and there was a lot of that around before 2012), you’re not going to get funding for the world’s biggest gallium project. That’s not going to happen, but if you have a good project and there’s money available for it, the early stage stuff is high-risk and not many people are currently chasing those opportunities.
Is Oil & Gas something that you’ve been keeping an eye on?
Yes, we have an Oil & Gas team. They’re based in London. They’ve been doing a number of the opportunities around the continent. Obviously, the last few months haven’t been nice for them. They’ve sweated a bit. They’ll take a bit of pain with some of the good projects in the short term, but the big projects are up and down West Africa and very interesting stories are up and down East Africa these days. Those will be done. The majors have lots of experience and those things will still continue to happen. There’s a lot of opportunity there.
With the perception that South Africa had opportunities with Oil & Gas, what of legislative uncertainty?
I’m not an exploration expert, but my understanding was that the original exploration in South Africa was chasing oil. Looking at it from a gas perspective, there’s a very different story and there are probably many opportunities in the gas environment, but it’s going to take a while to get there. I’m talking about offshore gas. Whether we’re ever going to agree on fracking, and look for the shale gas in the Karoo.. That’s been a game changer in the U.S. Whether that will ever be a game changer here, remains to be seen but I think there’s offshore gas opportunities off the coast here, just from looking at the data in a different way and it’s a different group of players. It’s not the old SUKO guys doing it, so I think there is opportunity but it’s a little further away. I think the guys have had the initial discoveries in East and West Africa.
If you were part of the discussion team discussing local implementation of the same mining lab ideas that Zuma saw in Malaysia, particularly with a vantage point from London, what would the big sore thumbs be?
South Africa has a mining industry that worked and it’s hard to see what one can do to make it work better. The big issue has been trying to get a fair return for various stakeholders in the country and trying different ways of doing that is possibly, something the Government’s fiddling with but actually, the mining industry here has all the right fundamentals. It has the resources. It has the people to do the work. It’s just a question of facilitating it and enabling the industry. I don’t know that there’s much more that we need to do, other than take our hand off the brake.
Then why are all the big players exiting S.A. or reducing their Capex spend? For example, Glencore and BHP.
I think there’s a hand on the brakes. I think that’s possibly, the biggest problem. It’s difficult to take a long-term view on these very big projects with legislative uncertainty. I think that’s the real question. Coal is here. It might possibly be a little bit of a tough time for steam coal now, but the resources are here. We have the fundamentals. We have the skills base. We have engineering companies that can service the industry and we’re largely protected from commodity problems by the Rand, so if you look at our basket, we’re okay here. I think it’s really, just a question of the legislative uncertainty – not knowing what you’re going to have over the next 20 years. Some of these projects are 20-year projects and you really need to have some certainty around that.
It’s interesting – you talking about the hand on the brake – What exactly, needs to be done to release it?
Well, I think it’s just taking away the uncertainty. You can have an opinion about whether the legislative regulations are worse here than anywhere else, but they need to be certain. You need to be able to work with them in the future. It takes you ten years to build a mine and ten years to recover your money. If you can’t take a long-term view on these things then you’re unlikely to attract the capital whether it’s from a mining company, domestic capital, or anything else, to go into these resources. It’s very difficult to attract that if you can’t see certainty. For example, it’s clear in West Africa where there are magnificent iron ore deposits but because of political instability, you can’t take a view on the infrastructure and no one will build infrastructure so you can’t develop the resources. It’s not as much the physical infrastructure, although we can whine about Eskom etcetera; I think it’s the legislative and regulatory infrastructure, which needs to be ensured here.
The Fraser Institute has been saying this for years and our legislators just don’t believe the Fraser Institute. It must come from a different angle.
It’s been a lot easier in the mining industry. From 2002 to 2012, it was easy to do anything. Commodity prices were going up. Anybody who had a buck was willing to put it into mining. Times are a lot tougher now. The phrase we’ve been saying is “the tide’s gone out. Now we can see whose swimming naked.” I think there might be a bit of that element in South Africa. You’re seeing the results of a difficult regulatory environment but then again, many people in a domestic market are willing to play in the market and maybe it will continue.
I’m glad you’re a fan of Warren Buffett. “When the tide goes out, that’s when you know who didn’t have their swimming trunks on.”
