Ross Gardiner - New Africa Mining Fund - Investing in juniors: When is it the right time to invest?


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Ross Gardiner delivered the presentation at 2014 Africa Iron Ore conference.

The Africa Iron Ore conference is the annual gathering for iron ore and stainless steel executives engaged in the African Region.

For more information about the event, please visit:

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Ross Gardiner - New Africa Mining Fund - Investing in juniors: When is it the right time to invest?

  1. 1. Investing in juniors – when is the right time to invest The 4th Annual Africa Iron Ore Conference Ross Gardiner 3 June 2014
  2. 2. Is there a place for venture capital ? • A venture capital investor provides funding to early-stage, high-potential, high risk, start-up exploration companies. • makes money by owning equity in the companies it invests in. • Investment occurs after the seed funding round as the first round of institutional capital . • The investment is undertaken looking for a return through an eventual realisation event, such as a trade sale of the project. • As in a typical venture capital portfolio, if a venture capital fund makes ten investments, two will be winners and create most of the gains in the fund.
  3. 3. Venture Capital returns • A minimum 'respectable' return for a portfolio (including the failures) is 25% per year. • Another way to look at this is that a five-year venture capital fund needs to repay investors three times (3x) their investment. This means that those two winner investments have to make a 7.5x return • and that’s just to generate a minimum respectable return. • It’s much more probable that a fund will have one 3x exit and one 12x exit. • Venture capital is generally a limited partnership. • This means that it only gets to invest the money once • But the actual investment can be in steps.
  4. 4. Factors driving decisions • Portfolio management is a critical factor • Avoid having too much exposure to one project/commodity • Always aware of a 2nd round at least of cash call • Usually want to share risk • Like minded investors • Looking for an exit • Remaining a diluted investor is not an option • Mining scares Venture Capitalists!! • The capital demands and timeline • Not the actual process
  5. 5. Iron ore is on the radar screen • Despite the threatened wave of new projects coming on stream; the reality is very different! • “Supply capacity continues to be constrained by • Reduced sources of project financing • Protracted approvals processes • Mid tier / Junior projects based on inferior resources • Challenges working in remote locations” • Source: Rio Tinto May 2014
  6. 6. Exploration spend by the majors 5% 48%39% 9% 3% 22% 13% 8% 26% 8%13% 5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Exploration and evaluation costs Revenue Iron Ore Copper Aluminium Energy D&M Central Rio Tinto: Spending on evaluation and revenue
  7. 7. Our Iron Ore check list  Quantity and quality of DSO  Logistics  Including ownership of road/rail  Port and loading facility  Including permitting  Tenure  Exit points  Capital requirements
  8. 8. Resources • DSO Product is our preferred product • Not because of cost of production but… • Capital costs • Reliance on electricity • Moisture content and shipping • There has to be a very special case made for magnetite / bDSO
  9. 9. Logistics • The key factor that differentiates operations • Successful operations • Australia • Brazil • South Africa • Not because of cost of production but… • Rail links already in place • Isolated with no other traffic
  10. 10. Market • Quality and type of product • Brand recognition could also be a factor
  11. 11. Capital Intensity • Cash cost per ton is only part of the story • Currently Rio Tinto’s brownfield expansions cost in the $150s/annual tonne
  12. 12. Real Interest Rates Country Name 2010 2011 2012 Australia 6,34 1,70 4,72 Brazil 29,35 34,51 29,70 China (0,82) (1,15) 4,10 United States 2,02 1,26 1,48 South Africa 2,45 2,79 3,12 Congo, Dem. Rep. 27,87 26,68 25,57 Source: The World Bank
  13. 13. Vale – Expansion capital • S11D • Mine and plant US$ 8.04 billion • Logistics infrastructure US$ 11.45 billion • Total US$ 19.49 billion • Full production in 2018 of 90Mtpa • At a nominal 20% Return on Capital; this equates to $43 per tonne. • Additional 40 Mtpa at Carajás • US$3.0bn for mining, US$ 4.1 billion for infrastructure • Full production in 2014 of 40Mtpa • At a nominal 20% Return on Capital; this equates to $35.5 per tonne.
  14. 14. Funding using alternative structures Chinese participation Source: CRU Strategy – March 2011
  15. 15. Delays and permissions • Due to the capital nature of iron ore mining • Down time can be very expensive • Anglo American is an example
  16. 16. Learning lessons from Brazil • Huge potential • Resources have quadrupled in a decade • Projects are plentiful • Quality of traditional area is dropping • Next generation of projects are driven by beneficiation plants • Capital costs are substantial obstacle • Projects outside the Iron Ore Quadrangle are driven by logistics • Permitting remains a material hurdle • Environmental and electricity • High local Interest rates • Borrowing rates up as high as 40%
  17. 17. Free Carry and intervention • The image of iron mining being highly profitable and cash generative, • Attracts government interest • Security of tenure is such an important factor • The fluidity of legislation is a concern • Free carry in a highly capitalised project can be a significant dampener on returns
  18. 18. So when is the right time? • It is not a matter of timing the commodity cycle • It is the ability to compete on a capital basis • This is not venture capital’s sweet spot • There are projects that could be attractive to Venture Capital • These would be small operations; small capex • But the returns would most likely be the cash generated • and this requires time!! • Something in short supply at a Venture Capital fund.
  19. 19. Iron Ore and Venture Capital • Iron Ore is not an industry where exploration and evaluation spending get you far • Funds in iron ore need to be directed towards building a mine and logistics. • Competing against the balance sheets of the 3 majors • Effectively, this means junior miners need to have significant capital behind them • Which by definition does that make them a junior?? • Venture Capital would seem to have a limited role in this industry • Our pockets are not deep enough • And we are always looking at the clock!!
  20. 20. Thank You 19 General and Closing