Mining project investment

A guide to finding strategic investors
August 14, 2015

A look at the potential sources of investors to mining projects and the approach to obtaining investment. First published in August, 2013.

Introduction

Finding the right investors for your business is an essential and sometimes daunting task for every mining entrepreneur. It is important to consider not only the financial capability of a potential investor but also determine what added benefits the investor could bring to the table. Whether it be mining expertise, access to new markets, vertical integration or access to finance, an investor that is able to support and facilitate the development of the project can be the difference between a pipe dream and achieving a fully built and operating project.

Potential investment sources

The following are a few of the most popular  sources of potential strategic investors to mining projects: 

  • Sovereign wealth funds
  • Asian investors – China, Korea, Japan and India
  • Professional investors
  • Offtakers
  • Traders & Majors

Sovereign wealth funds

Sizeable commodity reserves combined with high commodity prices in recent years has resulted in some countries accumulating large budgetary surpluses. This has resulted in an increase of sovereign wealth funds (SWFs) which are tasked with managing and investing the country’s wealth. A number of sovereign wealth funds have identified investment in mining projects involving strategic commodities as a high priority.

According to a survey of SWFs conducted by Norton Rose Fulbright, the majority of SWFs regarded ‘highest economic return’ as their most important investment criterion. Some SWFs will also be focused on particular jurisdictions or commodities which they view as strategic to their particular country or that may offer diversification away from those commodities which may have generated that sovereign’s surplus wealth.                             

Pros

Cons

SWFs are generally regarded as long term, commercial, largely passive investors. Their role alongside private equity investors is generally seen as complimentary rather than competitive. SWFs tend to have similar risk profiles to private equity. Commentators have expressed concerns about the transparency of sovereign wealth funds, their investment strategies, their size and whether their investments may be affected by political objectives. As a consequence, there are fears about the potential for protectionist restrictions being imposed on sovereign wealth fund investments, which could in turn restrict the international flow of investment capital.

China Inc

The surge in overseas investment by Chinese companies (both state owned enterprises (SOEs) and, increasingly, private companies) looks set to continue in line with recent trends. While exact figures are hard to come by, the total amount invested by Chinese companies offshore in 2009 reached US$230 billion, which puts China fifth in the rankings of global outbound investors, compared with a ranking of twelfth in 2008. Some reports predict an exponential take-off in Chinese investment in offshore assets by 2020.

In particular, SOEs in the natural resources sector have accelerated their search for overseas investment opportunities to take advantage of the uncertain economic climate in around the world.

Some of the leading Chinese companies to have expressed an interest in resource
assets include:

  • JTXC
  • China Nonferrous Metals Mining (CNMC)
  • Minmetals
  • CITIC Group
  • Chinalco
  • Zijin
  • Tongling

Mining companies will be aware of the current opportunity to raise money through Chinese investors, and need to be aware of the issues which they will be faced with when trying to secure PRC equity funding. An understanding of the issues involved, including the increased significance of due diligence for SOEs and the regulatory framework within which the parties must operate, will increase the likelihood of successfully completing a deal.                              

Pros

Cons

In addition to vast capital resources, Chinese SOEs also bring with them access to the remainder of China Inc, including competitive engineering, procurement and construction contractors, seemingly unquenchable offtakers of metals and minerals and liquid Chinese banks and export credit agencies.

Resource companies seeking to secure a Chinese investment should be prepared for a substantial due diligence process. Whereas the ready availability of cheap government finance and the drive to secure resources can mean that SOEs will be more willing to commit to the broad terms of the agreement at an early stage, they will almost certainly be obliged to present a comprehensive study of the investment to the Chinese governmental authorities when they seek approval for the investment and when they arrange their finance through Chinese banks.

Virtually all overseas investments by Chinese enterprises will require government approval in China before they are able to be completed. The level and extent of those approvals is largely governed by the ‘level’ of the investor if, as is often the case with significant investments in the resources sector, the investor is a SOE, and by the value of the investment.

Korea Inc

Since the Asian financial crisis, the South Korean economy has been restructured and focused on high end manufacturing and electronics. A good mix of export led and domestic demand has created a balanced economy which continues to liberalise at a fast pace.

This has created significant demand for resources. Unlike India and China, which have some access to their own resources, South Korea has little access to its own resources. South Korea has therefore come to rely on imports for its resource needs.

The main resource needs of South Korea centre around iron ore, copper, cobalt, coal and industrial minerals. Some of the leading South Korean companies to have expressed an interest in resource assets include:

  • KORES
  • POSCO
  • Samsung
  • LG
  • Hyundai                              

Pros

Cons

The larger privately owned enterprises with strong links to government agencies (the so called Chaebols) increasingly see the opportunity to pursue investment in assets overseas as a means of securing access to resources to meet the industrial needs of South Korea.

In addition to the Chaebols, a number of South Korean state owned companies are now becoming increasingly prominent on the international scene as they pursue the ‘invest to off-take model’ pursued by Chinese, Japanese and Indian companies.

The Chaebols (characterised by their conglomerate approach to business) can be hierarchical in their structure, meaning that the key to securing a deal relies on having the right relationships in South Korea. These relationships not only give access to key decision makers but more importantly help streamline the approval process for a major foreign investment.

The reliance of state owned companies on state funding and a large bureaucracy means that these state companies can be frustrating to deal with. However, they provide an important source of investment capital which is well worth considering.

India Inc

Although Indian GDP growth has moderated in the last couple of quarters, fundamentally the Indian economy remains on a high growth trajectory. This will be driven by domestic demand, the need for infrastructure development and a young and growing population.

These basic economic drivers will continue to drive demand for resources – the main ones being: coal (for power generation and steel making), iron ore (for steel making), copper (for India's continued industrialisation), gold (for industrial and consumer use – the Indians are the largest buyers of gold for jewellery), platinum (for the growing Indian car industry) and industrial metals (for the growing manufacturing base).

The democratic political system (India is the wold's largest fully functioning democratic system) combined with a fundamentally capitalist economy means that India Inc’s thirst for resources is driven by private enterprises as well as the large public sector undertakings (the so called PSUs).

Some of the leading Indian companies which have expressed interest in resource opportunities include: 

  • Private Enterprises
  • Aditya Birla
  • Tata
  • Reliance
  • Adani
  • Vedanta group of companies
  • Essar
  • PSUs
  • Coal of India
  • NMDC
  • KIOCL
  • Gujarat Mineral Development Corporation
  • Uranium Corporation of India

Private enterprises

Public sector undertakings (PSUs)

The private enterprises are being increasing supported by the state as they make their moves internationally to own and control resource assets for the purposes of investment but more importantly to secure access to off-take for India Inc. The principal motivation for these private enterprises is profit for their shareholders. However, the price of state support (through availability of foreign exchange, finance from state supported banks and a supportive policy framework) is that the interest of the state is factored into the decision making process. The net effect of this is that it can be difficult to strike a deal with such public enterprises as they seek to balance the profit motive with the state interest.

Often the key is a good relationship with the promoter behind the relevant private enterprise. That enables issues to be resolved with the key decision maker quickly and commercially. Handled in the correct way, a deal can be struck very quickly and implemented even faster assuming there is the right dynamic in the deal team.

The PSUs are reliant on a large bureaucracy and direct funding from the state. The state has the ultimate say through the relevant ministry. Thus decision making is slower and at times can appear to be driven by non-commercial factors. This can be frustrating to a dynamic, lean and commercially driven mining company. However, it is worth persevering with the right PSU as they give direct access to the state and they tend to be more ‘hands off’ when it comes to ongoing participation in management decision making.

Japan Inc

The Japanese are and have historically been active investors in iron ore, base metals, rare metals and rare earths, all of which are essential for Japan’s processing industries. In particular, Japan has invested heavily in overseas mining operations around the world as part of its strategy for securing raw materials for Japanese smelters. Many of the investments made have been with the aim of securing a minority share of the ownership of the mining operations, allied with the ability to be involved in the decision-making process for the mining operations.

The main Japanese investors are the trading houses including, ITOCHU, Mitsubishi, Mitsui, Sojitz and Sumitomo Corporation. Japanese mining companies such as Mitsui Mining & Smelting Co Ltd, Sumitomo Metal Mining Co., Ltd and Pan Pacific Copper Co Ltd (owned by JX Nippon Mining & Metals (66 per cent) and Mitsui Mining & Smelting (34 per cent)) are also involved in mining investment. These mining companies are affiliated with their respective trading houses.

Increasingly, Japanese trading houses are taking a majority interest in mining operations and an active role in operating such mining operations. For example, the San Cristobal zinc mine in Bolivia (Sumitomo Corporation) and the Panasqueira tungsten mine in Portugal (Sojitz) are operated by Japanese trading houses.

Japan’s trading houses are also starting to acquire interests in exploration and development projects with the aim of providing Japanese companies with raw materials. For example, the Esperanza copper project in Chile (30 per cent investment by Marubeni Corporation) began production last year.                     

Pros

Cons

Like other Asian investors, Japanese investors have access to large sources of capital (for example, JBIC financing) and are also able to provide access to EPC contractors, offtakers and export credit guarantees, through Nippon Export and Investment Insurance (NEXI)

 

Japanese investors, both private and state entities, will be focused typically on particular metals and securing supply to those commodities.

Japanese investors come with certain cultural nuances of doing business and for the unfamiliar these nuances can create real challenges for concluding a deal.

Professional investors

Professional investors, such as hedge funds and private equity firms are an obvious source of investment. However, one should note that it is not a ‘one size fits all’ with professional investors. Mining companies should ensure that they engage with a firm which is familiar with the commodity and markets, the type of mining to be conducted and the jurisdiction in which the project is located, to ensure that the firm properly understands the project and can ride through the challenges of operating in an emerging market. While some firms may have broad experience, it is not always the case of transposing the experience on one deal onto a different commodity or jurisdiction. Furthermore, companies should also determine early on the level of involvement that the investor will expect to have in the management and control of the operations of the project.                      

Pros

Cons

Professional investors can bring with them a wealth of experience and expertise which provide a useful source of guidance in making strategic decisions or during difficult times. Professional investors have a certain criteria which they expect mining projects to provide, including a minimum level of return, and are willing to turn up the heat on management when the project is under performing.

Traders & Majors

Trading companies and major mining companies are continuously looking for potential investments in mining companies and are often prepared to invest at an early stage. Almost all major mining companies and commodity trading houses are prepared to offer investment or finance packages in order to secure access to commodities. Packages may include pre-IPO equity investment, royalties, warrants or prepayments, but will always be linked to securing supply of the end product.

  • Traders
  • Glencore
  • Trafigura
  • Vitol
  • Noble
  • Majors
  • BHP Billiton
  • Vale
  • Rio Tinto                        

Pros

Cons

Majors and traders are very commercial operators and can move quickly when necessary. Both are usually willing to invest early stage and are familiar with assessing construction and operational risks. Majors and traders know the market well and will drive a hard bargain with their investment terms.

Finding a strategic investor: rules of engagement

01 | Draw up a timetable and stick to it!
Work backwards from when the investment needs to be injected into the Project and draw a detailed closing timetable. Consider the time that will be taken across four broad categories: preparation; obtaining expressions of interest; assessing offers and negotiating/closing. We can assist you in drawing up a timetable of what is aggressive but achievable.

02 | Appoint advisers at an early stage
Depending on your team’s expertise, consider appointing a financial adviser to run the investment competition, assist with preparing a financial model, prepare the information memorandum and, in collaboration with your appointed legal counsel, identify key due diligence issues.

03 | Prepare for due diligence
The company should, in conjunction with its advisers, prepare for due diligence by:

  • preparing a comprehensive virtual data room
  • drafting an introductory memorandum on the project and relevant documentation (including details regarding the history of the project/target and background/reputation of the management teams)
  • being prepared for significant Q&A
  • putting in place a comprehensive confidentiality agreement and ensure
  • all documents can be disclosed
  • preparing a summary of local applicable mining laws
  • having mining data and analysis ready for scrutiny.

04 | Identify and prioritise investors
Identify the range of potential investors and rank these in priority. Understanding each potential investor’s motivations and criteria for investment will ensure that you are better placed to target and spend your energy chasing those investors which are more likely to close on a deal.

05 | Determine what is on the table and what is not
Work through different investment options and packages to determine what you are aiming to achieve and the limits to which this can be stretched. There are endless ways to structure a deal and knowing what limits you are willing to go to will ensure that you remain focused in negotiating the terms.

06 | Keep your options open
Things change. Deals fall over. Keep your options open and alternatives available. To the extent you can, run interested parties in competition for as long as possible. Having alternative options available will ensure that you can hold your line and not be pushed into a corner.