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Investing in juniors –when is the right time to invest
The 4th Annual Africa Iron Ore Conference
Ross Gardiner
3 June 2014
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.
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.
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
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
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
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
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
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
Market
• Quality and type of product
• Brand recognition could also be a factor
Capital Intensity
• Cash cost per ton is only part of the story
• Currently Rio Tinto’s brownfield expansions cost in the $150s/annual tonne
Real Interest Rates
Country Name 2010 2011 2012
Australia 6,34 1,70 4,72
Brazil 29,35 34,51 29,70
China (0,82) (1,15) 4,10
United States 2,02 1,26 1,48
South Africa 2,45 2,79 3,12
Congo, Dem. Rep. 27,87 26,68 25,57
Source: The World Bank
Vale – Expansion capital
• S11D
• Mine and plant US$ 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.
Funding using alternative structures Chinese participation
Source: CRU Strategy – March 2011
Delays and permissions
• Due to the capital nature of iron ore mining
• Down time can be very expensive
• Anglo American is an example
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%
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
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.
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!!
Thank You
19
General and Closing