Australian Labor mayor slams party’s lack of support for mineworkers

Jenny Hill, the Labor Mayor of Townsville in the state of Queensland, northeastern Australia, slammed her own party this weekend saying that its lack of support for coal mining is pushing people towards right-wing political organizations.

At a conference held by a Labor think tank, Hill said that at the federal level, the centre-left Labor Party has not provided answers to the problems in north and central Queensland where mine workers are experiencing hard times.

“This term, over the last four years, we have been adamant: we support Adani. The reason for that is when you have a youth ­unemployment rate of 21 per cent at one point, and 13 per cent unemployment, particularly after the closure of Queensland Nickel, you have a community that is crying out for support,” Hill said at the event, according to The Australian.

In the mayor’s view, the lack of support from her party to Adani’s Carmichael coal mine in central Queensland -whose approval went through this year after almost a decade of negotiations- is caused by the influence of the “anti-worker” and “disruptive” Labor Environment Action Network LEAN.

Formed by a faction of Labor members­ that campaigns on environmental issues, LEAN successfully lobbied for at the party’s national conference to keep a 45 per cent emissions ­reduction target and a 50 per cent renewables target. 

However, for Hill, there has to be a balance between such objectives and Australia’s support for the mining industry. 

She reminded the audience that modern life would not be possible without the responsible extraction of Earth’s minerals. “Someone has got to mine it, someone has got to refine it and I would rather it be done in Australia than overseas. And that has been our mantra,” she is quoted as saying.

Commentary: Gold sector fragmentation hurts investors

Of all the mining sectors, gold is possibly the most fragmented, and the gold industry and its investors would realize considerable benefits from consolidation. Brokerage Pollitt & Co. estimates that 50% of global iron ore and copper production comes from four and 10 companies, respectively, while 25 companies account for just 45% of total gold production. Technical talent seems to be spread thin, too. An internal Resource Capital Fund study earlier this year reported that 107 mining projects that went from feasibility study through to construction were 38% over budget, on average, which indicates poor planning and engineering that could have been alleviated with more talent, and experienced engineers and planners.

The greatest potential for synergy and value creation rests among the large number of single-asset companies. Historically, such companies were merger and/or acquisition (M&A) targets for larger producers. However, producers have become reluctant to pursue M&A because:

The greatest potential for synergy and value creation rests among the large number of single-asset companies. Historically, such companies were merger and/or acquisition (M&A) targets for larger producers. However, producers have become reluctant to pursue M&A because:

  • Investors have soured on M&A as many companies overpaid for acquisitions in the past
  • It is difficult to know all of the risks contained in a target company
  • The strategic focus of most producers has shifted from growth through acquisitions to organic opportunities
  • Many majors are looking to sell non-core assets
  • Deals done at a premium bring arbitrageurs that substantially drive down the share price of the acquirer
  • Much of the share register winds up with arbitrageurs, which churns in the market for months
  • Valuations are low across the sector

The lack of M&A has resulted in an abundance of single-asset companies. An investment manager may now have a gold portfolio, for example, of 20 single-asset developers and five single-asset producers. These are the companies that are providing many new mine developments across the sector. When investing in a development company, shareholders expect to benefit when the company either gets acquired at a premium or when it takes its project to production. In this M&A environment, developers must plan on becoming mine builders and operators. Once a developer becomes a producer, we expect it to have its next project in view in order to grow into a mid-tier, multi-mine company.

An efficient way of unlocking the latent value of one-property companies is through a merger of equals. The benefits of creating larger multi-property companies include:

  • Deeper technical talent that is fungible across operations
  • Geopolitical risk that is spread across jurisdictions
  • Procurement scale that enables better pricing for materials and equipment
  • Reduced general and administrative costs
  • Cheaper access to capital
  • Ability to attract larger institutional investors
  • More opportunities to create value

Consolidation of single-asset companies to form larger multi-mine companies can unlock these benefits, and the shift in valuation has great potential. For example, let’s create a hypothetical “Mergco” with three companies that are currently single-asset: Detour Gold, Pretium Resources and Sabina Gold & Silver. According to their September 2019 corporate presentations, Detour and Pretium combined produce roughly 1.1 million oz. gold per year from their two mines, while Sabina has a shovel-ready project that could produce over 200,000 oz. per year. All are large projects in Canada with long mine lives. Mergco would have a combined $5.2-billion market capitalization, and, using RBC Capital Markets valuations, trade at a weighted average price/net asset value (P/NAV) of 0.83X.

Contrast this with Kirkland Lake Gold, which, according to its September 2019 company reports, also has roughly 1 million oz. of production, mainly from two mines in the safe jurisdictions of Canada and Australia. Kirkland has several exploration and development projects that may bring future growth. It has a $9.4-billion market capitalization and trades at a P/NAV of 1.92X. With good management and the advantages of larger scale, Mergco could achieve a valuation that should be closer to Kirkland’s. In a merger of equals, Mergco’s share price would have to increase 131% to match Kirkland’s P/NAV valuation. Achieving a re-rating of just half of this would still be a windfall to Mergco’s shareholders. In addition, a merger without premiums would reduce arbitrageur positioning — potentially freeing the stock to trade higher.

There are many combinations of single-asset companies around the world that would benefit from such consolidation, so why have we not seen such combinations?

  • Management adherence to the old M&A model, hoping to sell the company at a premium
  • Lack of vision amongst managements, boards and shareholders to achieve such an M&A outcome
  • Entrenched management protecting their jobs
  • Boards with no desire to maximize value for shareholders

It is time for single-asset gold companies and their shareholders to reconsider the M&A landscape and adapt new strategies that will build the mid-tiers and majors of the future.

— Joe Foster is a New York-based portfolio manager and gold strategist with VanEck.

(This article first appeared in the November 11-24, 2019 edition of The Northern Miner).

Horizonte releases PFS on Vermelho

Vermelho — one of the largest and highest-grade undeveloped laterite nickel-cobalt resources in the world — will generate US$7.3 billion in total cash flow over 38 years, Horizonte Minerals (TSX: HZM; LON: HZM) says.

The company acquired the Brazilian asset last year from Vale (NYSE: VALE) for US$8 million in cash — US$2-million upfront, and the balance on production.

The project will produce nickel and cobalt sulphate for the battery industry, and a prefeasibility study (PFS) released in October outlined a US$1.7-billion, after-tax net present value (NPV) at an 8% discount rate, and 26% internal rate of return (IRR) at a US$16,400-per-tonne, base-case nickel price.

“If you flex those economics to current long-term pricing at US$19,800 per tonne, the NPV goes to US$2.4 million and the IRR to 31.5%,” says Jeremy Martins, the company’s cofounder and CEO. “It’s a very cash-generative asset.”

The PFS puts initial capex at US$652 million, and estimates that at full production Vermelho would produce an average of 25,000 tonnes of nickel and 1,250 tonnes of cobalt per year using a high-pressure acid leach (HPAL) process.

Over the nearly four-decade mine life, Vermelho would produce 924,000 tonnes of nickel contained in nickel sulphate, 36,000 tonnes of cobalt contained in cobalt sulphate, and 4.5 million tonnes of kieserite — a by-product and form of fertilizer.

The project would use a hydro-metallurgical process consisting of a beneficiation plant, where the mineralized material would be upgraded before being fed to a HPAL and refining plant, which would produce the sulphates.

Martins says Horizonte wants to replicate the success at Coral Bay Nickel Corp.’s HPAL plant in the Philippines, where the company has churned out 20,000 tonnes of nickel per year using a twin-line HPAL plant — a low-capex operation that has operated for the last 15 years.

Japan’s Sumitomo Corp. is Coral Bay Nickel’s major shareholder and operator of the mine, Martins says, and would be the ideal partner for Vermelho down the road.

Horizonte will have to find a strategic or joint-venture partner to codevelop Vermelho, Martin says. “We’re flexible on what that structure would look like,” he says, but it has to be the best fit.

“We’re getting a lot of inbound interest from the battery-manufacturing arena, and we think the timing is right to bring in a partner, but the terms have to be right. We are acutely aware it has significant intrinsic value, and we need to make sure any partners allow us to capture that value ourselves. If the structure doesn’t allow that, we’ll advance it to the next stage ourselves.”

But Vermelho is actually Horizonte’s second development priority. The first, 85 km away, is its flagship Araguaia nickel project. Martins and his team hope to start construction there in mid-2020, depending on market conditions.

Inside the processing facilities at Horizonte Minerals’ Araguaia project in Brazil. (Image courtesy by Horizonte Minerals).

At the end of August, Horizonte signed a US$25-million royalty agreement with Orion Mine Finance. Under the deal, Orion will provide an upfront cash payment of US$25 million in exchange for a 2.25% royalty on Araguaia. The royalty only applies to the first 426,429 tonnes of contained nickel within the final product (ferronickel) produced and sold. This is equivalent to the nickel production estimated over the life-of-mine for Araguaia in the Stage 1 feasibility study.

The company also has seven banks working on financing deals, and Martins hopes to have a debt package finalized before July 2020.

“At the moment nickel prices and nickel fundamentals are looking compelling for the short- to medium-term, and there’s a lot of interest in the nickel space,” he says. “There are very few high-grade, low-cost and large-scale nickel opportunities that are ready in the development marketplace today.”

Araguaia would produce nickel for the stainless steel industry, which still accounts for 70% of the world’s consumption of the metal.

A feasibility study in October 2018 outlined an open-pit laterite operation delivering ore from a number of pits to a central processing plant using a single line rotary kiln electric furnace (RKEF) to extract ferronickel from the ore.

After an initial ramp-up, the plant is expected to reach full capacity of 900,000 tonnes dry ore feed per year to produce 52,000 tonnes ferronickel containing 14,500 tonnes nickel per year over 28 years.

The initial mine life generates after-tax free cash flow of US$1.6 billion based on a nickel price of US$14,000 per tonne. The project could be built for initial capex of US$443 million.

The project has been designed to allow for a second RKEF process plant, which would double Araguaia’s ferronickel output.

With Araguaia and Vermelho, Martin says, Horizonte controls 100% of the district, and, if both were to start commercial production, the company would rank “in the top-10 largest nickel producers in the world.”

Martin notes that Horizonte  finds itself with two enormous nickel projects at a “pretty exciting time” in the industry.

Nickel inventories on the London Metal Exchange are at their lowest level in the last seven years, he says, having moved from 500,000 tonnes of nickel in 2012 to today’s 90,000 tonnes.

At the same time, there is “robust” demand from the stainless steel market as well as from the emerging battery market for electric vehicles, which he says is likely to move from 3 million to 4 million electric cars on the market today, versus the projected 30 million to 40 million cars forecast by 2030.

While demand for the metal grows, he adds, “we have had 10 years of historic nickel price lows and very little capital coming into the nickel space.”

Finally, Indonesia’s decision in September to ban exports of nickel ore from January 2020 — two years earlier than expected — will have a huge impact, Martin says.

The Southeast Asian nation is the world’s largest nickel ore producer.

“Potentially over the next two years there will be a loss of around 200,000 tonnes of nickel ore supply,” Martin says. “So with the combination of dwindling inventory and lack of direct shipping ore out of Indonesia, we’ll see some very interesting pricing on nickel in the short- to medium-term.”

(This article first appeared in the November 11-24, 2019 edition of The Northern Miner). 

Commentary: Changes in financial markets trouble mining industry

Analysts at CPM have studied the precious metals and commodities markets — including investment trends in mining equities — since the 1970s. This long and intimate involvement gives us insight into the transformations that clearly now are wracking the buy side, the sell side and the mining industry.

The CPM Group recently completed a study of over-the-counter (OTC) and exchange metals markets. As part of the 2018–2019 project, CPM bought the best list of managers at hedge funds, commodity trade advisors and commodity pool operators. Of the 6,800 fund managers on the list, 132 trade metals. Of those, 35 base their investment decisions on economic and fundamental factors. The rest traded based on price charts, price momentum and computer-generated trades.

Fewer than 2% of professional money managers focusing on futures and options even trade metals, and fewer than 0.5% pay attention to trends in the metal markets, the mining industry, fabrication and investment demand, and the economic and political environments that shape these fundamentals.

Now CPM is studying institutional investment trends in mining and exploration companies. Institutional investors suffer from a range of transformations. There is a trend towards lower fees, reducing revenues and profits. Funds increasingly are investing in indexed exchange-traded funds (ETFs) and funds  packaging numerous companies, rather than individual companies. They also are shifting from funds managed by human portfolio managers and research teams to funds driven by computer-generated decisions.

When Barrick Gold made overtures towards Newmont earlier this year, a rumour spread that “not even Evy Hambro’s fund” at BlackRock owned Barrick shares. In fact, it did. There were 65 BlackRock funds that owned Barrick shares. Five of them were managed by analysts and portfolio managers. The other 60 were indexed funds and ETFs.

The BlackRock data reflects similar changes in equity investment trends, away from investing in individual companies based on fundamental analysis, towards investing in indexed funds and ETFs.

Jeffrey Christian, managing partner, CPM Group.

The shift towards investing in indexed ETFs and funds means that mining companies large enough to be in such indexes have seen their prices rise, as generalist investors have bought such indexed investments in response to rising gold prices. Smaller mining companies not in such indexes have been largely flat, and face increasing difficulty in raising capital.

Banks and brokers are experiencing major negative shocks themselves. Their revenue models are being shattered by the virtual and actual disappearance of broking fees, rising costs, increased regulatory requirements and expenses, poor returns on installed capital, and a reluctance on the part of their institutional investors to pay for broker-generated research.

As we studied these major transformations on the buy side, the sell side, and the consequent financial pinch on the mining industry, the question arose: What does this mean for CPM’s service provision to investors, mining companies and the sell side of financial markets in the future? The answer partly is evident in the past.

As institutional investors pivot away from free research from banks, brokers and promotional agencies supported by mining companies, they are focusing on what is being called “curated research,” picking and choosing a limited number of highly respected, independent, unbiased, knowledgeable research and advisory services. CPM is viewed as a quality source of research on precious metals and commodities by those institutional investors that still are economically and fundamentally driven. One executive put it succinctly: CPM sells research. They sell advertising.

This suggests that the future client portfolio at CPM will be much as it has been since we bought our independence from Goldman Sachs in 1986. In 1991, we were told that three of our institutional investment clients represented more than two-thirds of the open interest in Comex gold futures and options markets. The reality is that the precious metals physical and mining equities markets always have been characterized by relatively small numbers of highly focused investors who pay attention to the fundamentals.

Markets today are witnessing a shift away from fundamentally driven investment decisions toward mechanized, automated mass-market investment products. This trend will last until markets change in a way not predicted by algorithms — based as they are on history and not present circumstances. Meanwhile, there will continue to be any number of investors, wealthy and ordinary, who will continue to want sentient human beings managing at least  part of their money. Those investors will continue to focus on the fundamentals of the mining industry, the metal markets, and the underlying economic and political environment or landscape. They will continue to outperform the indexed funds, especially at turning points, as was the case in 2001, 2007 and 2011.

— Jeffrey Christian is the managing partner of CPM Group, a commodities research and management, consulting and financial advisory firm in New York. He founded the company in 1986, spinning off the Commodities Research Group from Goldman Sachs & Co., and its commodities trading arm, J. Aron & Company.

(This article first appeared in the November 11-24, 2019 edition of The Northern Miner

Australia’s mining tycoon Andrew Forrest invests in giant solar farm

Australian mining billionaire and philanthropist Andrew “Twiggy” Forrest is said to have come to the rescue of a massive and troubled solar farm in Western Australia’s Wheatbelt, by agreeing to invest in the A$130 million ($88m) project.

Sydney-based Sun Brilliance has been working on a 100-megawatt solar farm at Cunderdin, about two hours east of Perth, since 2016. The company, however, has struggled to secure financing and faced snags connecting to the grid since it first proposed the project in 2016, Australian Broadcasting Corporation (ABC) reports.

Sun Brilliance confirmed through a tweet on Friday that it had held “very positive discussions” with a “high-calibre investor” to back its project, but didn’t mention Forrester or any of its companies.

Just two weeks ago, the founder of iron ore miner Fortescue Metals Group (ASX: FMG) grabbed headlines for backing another solar farm in Australia’s Northern Territory, which is expected to supply electricity to Singapore.

The company behind that project, Sun Cable, said Forrest’s Squadron Energy and Grok Ventures had become co-lead investors in the A$20bn-plus development. If successful, the so called Australia-Singapore Power Link development would include a 10-gigawatt-capacity array of panels spread across 15,000 hectares near Tennant Creek, backed by about 22 gigawatt-hours in battery storage.

The NT plan is being developed alongside a similarly ambitious proposal for the Pilbara, the Asian Renewable Energy Hub. The proposed 15-gigawatt wind and solar hybrid plant is expected to power local industry and develop a green hydrogen manufacturing hub.

Forrester is also investing in 60 megawatt (MW) solar farm being built by Alinta Energy at Christmas Creek, which would help replace diesel generation at mines owned by Fortescue Metals.

Kinross walks away from promising Ecuador project with Lundin shares sale

Canadian miner Kinross Gold (TSX:G) (NYSE:KGC) is selling its remaining 20.7 million shares in Lundin Gold (TSX:LUG), equivalent to a 9.2% stake, to the other two major investors in the Ecuador-focused company, in a deal valued at roughly C$150 million ($114m).

The buyers, a wholly-owned subsidiary of Australia’s Newcrest Mining (ASX: NCM) and the Lundin Family Trust, will see their interest in Lundin increase from 27% to 32% and from 23% to 27%, respectively.

Kinross said the move was part of its portfolio streamlining strategy, which included last week’s sale of its full precious metal royalty portfolio to Maverix Metals (TSX:MMX). It also noted that the transaction is expected to close immediately.

Lundin, worth C$1.7 billion, owns the Fruta del Norte gold-silver-mine in Ecuador, which it acquired from Kinross in 2014 for $240 million and which began production in November.

The Vancouver-based miner has been developing the asset for almost two years, following a 2016 agreement with Ecuador’s government, something its previous owner was never able to accomplish. The deal allowed Lundin to move ahead with the project, located in the southeastern Amazon province of Zamora Chinchipe.

The underground gold and silver mine contains six of the company’s 29 mining concessions in Ecuador and covers 70,000 hectares of land. Discovered in 2006, Fruta del Norte is expected to produce almost 4.7 million ounces of gold over a 15 year mine life.

Ecuador has gained ground as a mining investment destination over the past two years, with top miners entering into joint ventures or investing in juniors to gain exposure to projects in the country.

Anglo American (LON: AAL) also landed in the South American nation through a deal with Canada’s Luminex Resources (TSX-V: LR). The company plans to develop two copper and gold concessions there.

Currently, Ecuador’s emerging mining sector employs 5,000 people, but estimates the figure will rise to about 16,000 next year if the country’s finances don’t take a turn for the worse.

The outlook is dubious, however, as the Congress rejected in November a reform bill presented by President Lenin Moreno, which was part of a $4.2 billion financing agreement with the International Monetary Fund (IMF).

“The inconvenient reality is that if Ecuador loses IMF support, then they lose market access,” Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, wrote in a note.

Moreno’s measures to comply with the IMF program have been criticized by the wide range of topics included — from student debt to mining policy and central bank autonomy.

First Cobalt on track for 2020 refinery restart with Glencore

Canada’s First Cobalt (TSX-V:FCC) released an update Wednesday on the progress of recommissioning its cobalt refinery in partnership with Glencore (LON:GLEN).

The mining and commodities trader giant is lending First Cobalt an initial $5 million to restart the company’s refinery in Ontario, which would become the only primary producer of refined cobalt for the electric vehicle (EV) market in North America.

Glencore said in August that once a definitive feasibility study for a planned expansion is completed, which is expected to happen in early 2020, it would invest another $40 million into recommissioning and expanding the refinery, located 600 km from the US border

First Cobalt says it is on schedule for Q1 2020 completion of a prefeasibility study for a 12 tonnes per day restart and a second definitive feasibility study for a 55 tonnes per day expansion scenario in the second half of 2021.

“With Glencore as our partner, our intention is to bring a reliable source of ethical cobalt to North America in 2020’s,” said Trent Mell, the company’s president and CEO.

“With Glencore as our partner, our intention is to bring a reliable source of ethical cobalt to North America in 2020”

Trent Mell, First Cobalt CEO

Based on a scoping study released earlier this year, the capital cost of expanding the First Cobalt refinery to 55 t/d came in at $37.5 million. An estimated 25,000 tonnes per year of battery grade cobalt sulfate could be produced.

The First Cobalt refinery is located in the Canadian cobalt camp in northern Ontario. It is the only permitted primary cobalt refinery in North America.

At market close Wednesday, First Cobalt’s stock was up over 4% on the TSX-V. The company has a C$46.5 million market capitalization.