Prime Meridians – Anatomy Of A Winning Mining Investment

This week in Pierce Points:

China invested in Russian oil. CEFC Energy’s $9 billion stake in Rosneft could shift energy alliances globally

Tanzania arrested miners. Police detained three gems executives, and seized a reported $29.5 million in diamonds.   

Moody’s warned on South Africa gold. The ratings agency says many mines will soon be “restructured or closed”. 

India’s coal plants hit a crisis. Numerous generators have “super critical” supply levels — and they’re turning to natgas

Chinese miners eyed Indonesia gold. Private equity may make 100% gains selling the Martabe mine, just 18 months after buying it.

Anatomy Of A Winning Mining Investment

Further to the last item above, private equity firm EMR Capital appears to have pulled off a rare feat in the mining world.

Make money on an advanced asset.

Since 2013, with the general downturn in metals prices, there’s been a lot of talk about “picking up cheap assets”. With numerous groups raising millions or even billions in funding to go bottom-fishing.

But executing this strategy has proved difficult. Evidenced by high-profile funds like X2 Resources — which raised $5.6 billion, but failed to complete a single project acquisition over three years of depressed markets.

Elsewhere, the story has largely been the same. Cupric Canyon, a “dream team” of Phelps Dodge executives — was formed in 2010, and in the seven years since has completed exactly 2 adjacent deals in Botswana. Despite access to big capital from financial backers like Barclays.

But EMR Capital has been a different story.

Over the last 18 months, EMR has already done three acquisitions: starting with the Martabe gold mine in Indonesia in March 2016, then moving to the Golden Grove copper mine in Australia late last year, and finally an 80% interest in the Lubambe copper project in Zambia this past August.

That’s an impressive string of buys — amounting to nearly $1 billion in deployed capital.

Of course, simply spending money doesn’t mean anything by itself. The key is, getting a good return on that capital.

And this week’s news shows EMR may be succeeding on that front, very quickly.

Sources are suggesting the Martabe mine could sell for up to $1.5 billion. Which would be a nearly 100% gain on the $775 million the EMR-led consortium paid for the mine last year.

That would be a very impressive result. Showing it is indeed possible to make money picking out good advanced assets globally in the mining space.

So what did EMR do differently to create this big opportunity?

Let’s look at a few instructive points on the transaction.

1) Have a plan, right from the beginning

Most deals of this size take months if not years to negotiate and complete. Meaning that negotiations between EMR and the potential acquirers likely started not long after EMR initially bought the project — just 18 months ago. 

That means management probably had ideas on potential buyers even before they made their initial purchase of the mine. 

This is a critical point. In many cases, substantial value can be created from an asset simply by recognizing who really wants it — and getting those parties to the table.

If you’d asked most mining insiders the last two years, they would have told you Indonesia assets were a tough sell. But EMR recognized that select groups — in this case, China firms — are very comfortable with 1) Asia, and 2) challenging governmental jurisdictions. 

By connecting the right asset with the right party, value is created. But you need to have that plan right from the beginning to make such arbitrage work. 

2) Manage local conditions

One of the most reliably-successful ways to find undervalued assets is assessing political risk. Markets tend to over-discount political problems (the same way they usually under-discount technical problems). 

Successful investors add value by finding ways to make seemingly-insurmountable politics work. And usually that means getting the right local people involved. 

In EMR’s case, the consortium that completed the Martabe buyout included a significant minority interest that went to Indonesians. And having those insiders involved can go a long way in making sure things run smoothly — and convincing potential buyers that all is okay with the asset. 

3) Know your sandbox

Both of the above points are infinitely easier if you’re working in an area you understand deeply. EMR, for example, has a stated focus on Asia-Pacific — which almost certainly helped in knowing Chinese firms that might buy Martabe, and recognizing the on-the-ground picture in Indonesia needed to get things done. 

In this case, EMR has actually been taken to task for being a little too close to the asset. With the private equity group’s chairman Owen Hegarty also serving as vice-chairman of former Martabe owner G Resources, when that firm sold the mine to EMR. 

There have been allegations that G Resources under-valued the $775 million sale price to EMR. But whatever the case, the upside is EMR was working with an asset where it had intimate knowledge — both in terms of technical and operating conditions. 

Of course the real test will be to see whether EMR can do it again with the company’s remaining assets. Watch for more deals from the company, and for continued activity from private equity in the mining industry, and the wider natural resources space. 

Here’s to the golden rules,

Dave Forest

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