The bottom of the cycle — are we there yet?
This year’s Prospectors & Developers Association of Canada (PDAC) convention in Toronto appeared to be down again in numbers with miners gritting their teeth — not because they were suffering from the cold weather that so often accompanies the conference, but simply as an indication of their resolute approach to another year where the sector is likely to remain out of favour with investors, and cost-saving remains the norm.
Given the sheer diversity and size of the conference, it is always difficult to identify trends, but here are several key themes we noticed along the way, particularly during our well-attended seminars and networking receptions — from private equity and risk mitigation to metals and regional trends.
Trend watch: Private equity — a knight's tale
With a dearth of investment in the capital markets, we ran a private equity panel this year to see if some of last year’s predictions had come true. Had the dashing knights of private equity come to the rescue of those juniors in distress? Sadly, it appears that only a few fair maidens have been worthy of their affections. Our research showed the following trends. Minority stake investments are the norm. Increasingly, management is investing alongside private equity. Convertible debt is being issued with regularity. Warrants are being included as part of the investments as sweeteners. Shareholder activism by private equity funds is also on the rise.
It has also become apparent that each private equity firm has its own specific investment criteria, narrowing the otherwise large pool of capital available to more specific situations that may only be applicable to a few of their suitors.
For those with assets in more difficult jurisdictions, the message was relatively clear. As quoted by one of our panellists whose job involves travel to countries where a portfolio company may need assistance, “I won't invest somewhere I can't take my family.”
Trend watch: Risky business
Our risk mitigation seminar was particularly well attended, even on an early Wednesday morning. Clearly, the four risks covered — political, business integrity, health, and kidnap and ransom — remain a major concern in emerging markets. Criminals have businesses to run, too, and it was made clear that hostage situations, for example, thrive in those countries where they face low risk and high returns. However, with some forward planning, our specialist panel showed that even smaller companies can afford to implement effective mitigation strategies.
On the panel were Chris Arehart, Avril Cole, Dr. Myles Druckman, and Glen Jennings. Our moderator was Jonathan Drimmer, vice-president and assistant general counsel of Barrick Gold Corporation.
Trend watch: Regions
Africa: The address by the South African Minister of Mineral Resources, the Honourable Advocate Ngoako Ramatlhodi, at the MineAfrica breakfast event provided some encouraging messages in relation to a country that has recently struggled with power, indigenization and labour issues. A more certain investment environment was emphasized in the presentation given in our offices by the Limpopo regional government of South Africa and Ivanhoe Mines. Other African nations spotted at the conference included Swaziland, Kenya (which is launching a new mining code), Burkina Faso, Mali, Niger, Nigeria, Guinea and Namibia (the top-ranked mining investment destination on the African continent according to the recently released Fraser Institute Survey of Mining Companies).
Australia: There were few Australian companies noticeable this year, but a trade delegation headed by the Australian Minister for Trade and Investment, the Honourable Andrew Robb AO MP, was a very welcome visitor to our annual reception.
China: There were fewer delegates from China attending this year, but those in the Chinese mining community who attended were hopeful that the mining industry’s prolonged “winter” was to soon end with “spring” right around the corner. It was also fittingly noted that the Chinese word for “crisis” comprises two characters that can represent both “danger” and “opportunity.” The sense is that Chinese growth will be steady this year, with several larger enterprises in a position, perhaps later in the year, to take advantage of acquisition opportunities in the mining sector.
Latin America: In our fifth annual Latin American panel, a full room of friends and clients heard from some of the top mining lawyers from Latin America that some jurisdictions are faring better than others in this downturn. While Latin America is a leader in global mine production, it was clear that 2014 was a bleak year for mining around the world. There is still much uncertainty concerning metal demand, production costs and access to financing, and most miners have shrunk, focusing on high-margin mines and increasing productivity. There is little spending on exploration, and little interest in looking at juniors with exploration opportunities. However, since world-class deposits are harder to find and production needs to be replaced, there is an expectation that the mining cycle will commence anew in the near term.
Venezuela, Argentina and Bolivia continue to be perceived as the most difficult places to invest. Peru seems to have overtaken Chile as the country with the best mining-investment climate, with new laws to reduce red tape and delays in obtaining permitting, as well as a plan to reduce taxes in the future, as Chile deals with a new tax regime and continuing issues with power and water in the north.
Meanwhile, Brazil is struggling with negative perceptions around its political system and mining investment environment, while Mexico is still coming to grips with its new mining tax regime, and Colombia is finally seeing its regulatory bodies functioning in support of mining but has to deal with the highest "state take" in Latin America. Lastly, Ecuador appears to have taken some positive steps forward with its plans to become a mining jurisdiction. But it may have to wait for the industry to improve before any significant investment is made.
Trend watch: Metals
Bulk commodities clearly remain out of fashion, with the outlook for base metals remaining favourable, and possibly a rise in gold prices in the medium term.