Special Report from the SME Conference: How to Find
Money in Any Market
The Gold Report www.TheAUReport.com
COMPANIES MENTIONED
Royal Gold Inc.
Silver Wheaton Corp.
Tim Alch
Behre Dolbear & Company
Tel.: (845) 480-1434
[email protected]
Streetwise Reports LLC
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THE ENERGY REPORT
THE GOLD REPORT
THE LIFE SCIENCES REPORT
THE METALS REPORT
05/06/2013
Money: mining companies need it and investors want to know what
companies will use that money to make them money. An innovative
conference sponsored by the Society for Mining, Metallurgy and Exploration
(SME) called "Current Trends in Mining Finance—An Executive's Guide: What
Are Lenders, Investors Looking For?" brought together about 145 experts
who were actively funding and running companies for answers. In this
interview with The Gold Report , SME Executive Director David Kanagy and
Conference Co-Chair Tim Alch share some insights about alternative funding
that could help more companies survive the year.
Source: JT Long of The Gold Report
The Gold Report: You put on a two-day conference last week in New York,
"Current Trends in Mining Finance—An Executive's Guide: What Are Lenders,
Investors looking For?" Why this topic now?
David Kanagy: SME has held some financial conferences in the past, but it has
been more than 10 years since the last one, so it was time. The program was
intended for senior executives and mining industry specialists, bankers, analysts
and investors. It covered project evaluation and executive decision making,
mergers and acquisitions, tax and accounting issues, resources and reserve
reporting, and other risk factors that are making the current financial market for the
minerals industry a bit difficult right now.
TGR: What has changed in the market since 2008? Is this really the worst market
you've seen or does it just feel like that?
Tim Alch: The market rebounded nicely immediately after the 2008 financial crisis
largely as a result of China's continued growth. However, in the last two years
China has been perceived as slowing from an average of 10% gross domestic
product (GDP) annual growth to something approximating 7–7.5%. This growth is
on a larger GDP number, however, which is important to understand.
Today, we are also concerned about the European market and, most immediately,
price support in the commodity sector. Over the last 10 years, costs of production
have been steadily rising so there is considerable concern right now that the strong
pricing environment the metals and minerals sectors enjoyed may be subject to
pressure. The environment has become very selective and risk-off, particularly in
the global mining finance space in the past 9–10 months.
The financial markets impact lending and investor appetite for risk. Luckily
alternative sources of capital are stepping into the fray. Private equity, as well as
sovereign wealth funds and state-owned enterprises from Korea, Japan and China,
are now investing in natural resources.
TGR: Are countries looking to secure access to coal, oil and base metals to fund
future growth or are they looking at it purely from a return on investment standpoint?
TA: In certain sectors and geographies, stability and security of supply of raw
materials is a concern and it is driving certain parties to invest with just more than
internal rate of return concerns.
TGR: Where is this supply security showing itself to be most important? Base
metals, rare earths, gold? Are they looking for short-term fixes or focusing on longterm security?
DK: All of the above. Every sector has its own challenges. It's a difficult and a
complex market right now. No one (with the exception of strategic long-term
investors) is looking to long long-term greenfield investment projects. The ones that
will get the best funding right now are more short-term opportunities that could get
an immediate return or a greater return over the next few years.
TA: Some enterprises, including electronics companies or automobile
manufacturing companies or even steel industry producers, have in the last several
years made strategic investments in projects, properties and resources to ensure
that they have a stable supply of various industrial minerals, including copper, iron
ore, rare earths and the electronics metals, as a result of their need to ensure that
they will have a steady supply.
TGR: If these alternative funding sources are looking for short-term needs rather
than long-term payoffs, does that mean that the producers will recover faster than
the explorers?
DK: I would say that that's a true statement.
TA: What is of interest in the space today are brownfield expansion projects as
opposed to the greenfield or exploration-oriented projects. Those projects that are
adjacent to existing properties or operations and that are clearly identified as being
low-cost are seeing money continued to be invested, but it is on a very selective
basis.
TGR: Is that also true of gold and silver? Is there interest in precious metals
exploration projects? And, if so, is there more interest in certain parts of the world?
TA: There is still interest in the precious metals sector as a store of wealth due in
part to inflation concerns within the current monetary easing policy. But investment
is going into jurisdictions with stable, secure political environments that are less
subject to changes in rules and regulations to delay projects from advancing.
TGR: Previously, you listed the different alternative funding sources; did the
conference cover streaming and royalty companies? Have they been a factor in
keeping the lights on for mining companies?
TA: Yes, streaming, forward sales and alternative sources of capital were
discussed along with private equity.
TGR: Crowd-sourcing is something new in the finance sector. Is it part of the mining
sector or is it just talked about more than it is being done?
TA: My sense is that it's too early in the mining and minerals space to say if it is
actually having an impact. We are still largely dependent upon traditional sources,
as well as the alternative sources, including forward sales, royalties, streaming,
private equity and the sovereign wealth funds, as well as state-owned enterprises.
Remember mining is a capital intensive sector.
TGR: On the royalty and streaming side, a number of new, smaller players doing
small deals have joined the big royalty companies. Do you think that's a sign of that
market maturing? Will there be even more companies coming into the space or is
there only so much room and we can look forward to consolidation in the royalty
space?
DK: My sense is that there's more interest in greater participation by a greater
number of players in the royalty and streaming space because there's opportunity
and need for it. Where there's opportunity and margins are still realizable, that's
where the capital is going. A lot of these are very one-off type of situations. But a
few larger ones, including Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Silver
Wheaton Corp. (SLW:TSX; SLW:NYSE), have been successful. They're tapping an
opportunity with their expertise, as well as the capital they have available. I think
royalties and streaming are going to play a greater part down the road.
TGR: What about private equity? Is that becoming a more important source of
funding?
TA: It is because certain informed, long-term or long-only investors perceive value
in the space. The equity valuations in the mining and minerals space have become
so depressed in the last year and certain private equity investors see an
opportunity.
TGR: Are there things companies can accomplish with private equity that might be
more difficult in the public market?
TA: Companies can tailor the relationship from the beginning between
management and the private equity sponsor. The long-term support that comes with
that relationship is also very important in an environment like this.
TGR: There has been quite a bit of debate about what's going to happen to all the
junior mining companies on the TSX. Some have said that as many as 500
companies listed on the Venture Exchange are going to go out of business in the
next year. Will all these alternative sources of funding allow more companies to get
through this difficult funding period?
DK: There will be some contraction, but I am hopeful and don't think it will be on the
massive scale you've just mentioned. People are very cautious right now.
Companies seeking or in need of capital in the current environment will have to
demonstrate that a project has possible returns in the next 2–3 years rather than 10
–20 years out.
TA: Low-cost operations and production is paramount to attract investment. If a
company can demonstrate high-grade quality of resources in the ground that can be
produced at low costs within the first or second quartile of industry cost curves,
those projects are better able to raise capital and find interest among the investment
community.
TGR: Is that even more important with the institutional audience? Are institutions
getting back into this market and, if so, what will it take to keep them there?
TA: The intermediate to long-term outlook—even the near-term outlook—for the
mining sector is very favorable, but it needs to be carefully scrutinized and I don't
think the institutions have walked away. They are just sharpening their pencils like
all investors today and making sure that they will see a return. The fundamental
long-term story for raw materials, metals and minerals is intact on a macro basis
worldwide. Growth in emerging markets—where demand for raw materials on a per
capita or growth of GDP basis is greater than in the developed nations—is intact
and likely will continue growing at above average rates.
DK: You started the conversation by asking whether these are the worst conditions
the metals market has seen, and I would say they are not. It may not be as lucrative
as it was two or three years ago. It's more difficult now, but I don't think it's the worst
we've seen. But it is changing and I think the investors and lenders are asking more
questions. People are doing better due diligence, asking more questions
—questions that probably should have been asked many years ago. Now that the
need for a return is paramount, investors are asking more and better questions.
TGR: We have talked about a number of different funding trends. What answers do
you hope attendees came away with from your conference?
DK: We featured about 50 speakers in 17 panels on topics ranging from lending
and financing to political risk. The 145 people attending heard from leading experts
from the banking, financial and technical advisory sectors, as well as accounting,
legal, political risk and social and local economic development experts who all
shared what they are seeing today and how they are managing opportunities for
investing or financing in the global mining sector. Many attendees expressed
thanks and walked away saying they learned from the experiences and
observations of others. All of which has encouraged the SME to have this
conference again next year.
TA: This was more than just an educational seminar—it was a chance for investors
to get real answers from experts about what they are doing right now.
TGR: Thanks for your insights.
Tim Alch is a vice president and senior minerals business analyst at Behre
Dolbear & Co. (USA) Inc. Alch is an international business, investment analyst
and consultant with 25+ years of experience working within business units
analyzing prospective, operating, management, strategy, technical, technology,
valuation, transactions and investment issues for industrial and financial clients.
He was a senior vice president of Anderson & Schwab Inc. and equity analyst at
Dean Witter Reynolds, Prudential Securities, Paine Webber and senior consultant
and industry analyst at World Steel Dynamics, Resource Strategies, Inc., CRU Inc.
(London), covering global precious, base and industrial metals and minerals,
mining, steel, coal, energy and related sectors. He is an honors graduate of
Amherst College in geology and studied the economic and political impact of the
Industrial Revolution and modern economy on the global mineral and energy
resource Sectors. He continued his studies in the Master of Science mineral and
energy economics program at Penn State. Alch has been on the Executive
Committee of the New York Section of SME since 2008 and co-chaired the
"Current Trends in Mining Finance—An Executive's Guide: What Are Lenders,
Investors Looking For?" conference.
Dave Kanagy is the executive director for the Society for Mining, Metallurgy and
Exploration, which is located in Englewood, Colorado; he joined SME in March
2004. Kanagy has worked over 29 years with nonprofit organizations. He has a
Bachelor of Science degree in industrial education from the University of
Maryland and a Master of Science degree in technology education from Eastern
Illinois University. Kanagy is also a certified association executive by the American
Society of Association Executives. He has also completed a six-year association
management-development program from the University of Delaware's Institute of
Organizational Management.
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IMPORTANT DISCLOSURES
1) JT Long conducted this interview for The Gold Report and provides services to The Gold Report as an employee. She or her family own shares
of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Royal Gold Inc. Streetwise Reports does not accept stock
in exchange for its services or as sponsorship payment.
3) Tim Alch: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the
following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this
interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments
and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the
interview.
4) David Kanagy: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the
following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this
interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments
and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the
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