Is it possible for resource companies to communicate too much? Instinctively, many investors would disagree, welcoming all a junior miner or oil explorer might have to say. Resource projects are often remote, their assets only knowable with an industrial drill, a team of geologists and a small army of suppliers. When information is that asymmetric, any detail feels like greater transparency.
But at some point, transparency can also feel like over-sharing – or perhaps hype in the name of transparency. In the case of SolGold (SOLG), which made the Cascabel copper-gold discovery in Ecuador, the hype may well be warranted. But the prospective miner is also guilty of a stream-of-consciousness-like approach to market announcements. The company has put out an exploration update at the rate of once a fortnight over the past year.
To be fair, SolGold is in the thick of exploration work, of which Cascabel is just one part. The miner’s 84 geologists are trying to make sense of 10 major targets over an area of around 3,200 square kilometres. Dozens more exploration targets are the focus of four subsidiary companies.
And so long as drilling and resource expansion remains the core focus, SolGold’s newsflow will be more erratic than the normal run of production and trading updates. This is the bind of resource stocks. Usually, producers’ shares are driven by commodity prices, with long-term sustainability and exploration a secondary consideration. Explorers, aware of the patience of markets, are wont to fill the production gap with evidence of any capital growth.
For SolGold, this is both necessary and defensive. Questions have been raised over claims the project is ‘tier one’ (ie, world-class), and whether the grades and quality of Cascabel’s mineralisation are enough for SolGold (or a potential acquirer) to finance the incredibly complicated task of building an underground block-cave mine beneath the Ecuadorian jungle.
But the messaging can also feel a little chaotic. Since January’s maiden resource estimate for the Alpala deposit – which revealed 7.4m tonnes of copper on an inferred and indicated basis – a further 73.4km of drilling has been completed. Beyond suggestions that the resource estimate “could double”, it is tricky to know what shareholders are being asked to value. Until a resource update arrives, and with the $70m (£53m) earmarked for drilling slowly eroding, the shares may well remain subdued at 23p. That is, unless shareholder Newcrest Mining (ASX:NCM) decides it has stared long and hard enough at the shop window to table a bid.
On the latter point, shareholders should remain circumspect. In a recent overview of his company’s growth options and investments, Newcrest chief executive Sandeep Biswas suggested securing a fifth tier one asset – to which Cascabel is a contender – will be “challenging, but it’s not insurmountable”. Whether Mr Biswas is just keeping his cards close, the stakes have been raised for the next definitive resource update – and not just next week’s assay results.
From the jungle to Yorkshire
In terms of project development, Sirius Minerals (SXX) is several stages further down the road. For one, the $1.2bn raised in 2016 is already being used to commence shaft-sinking and transport operations at Sirius’s Yorkshire polyhalite mine. The communication strategy has also evolved, and is now structured around quarterly progress updates; on balance, a form of engagement better suited to a miner with an enormous retail investor following and broad public interest.
But the prospective potash miner still has a lot to say, because, like SolGold, it needs to attract a lot more capital. Specifically, Sirius has said it needs up to $3bn in debt financing.
In recent months, the company has received what it described as “positive” commitment letters and proposals from banks, and expects more. Those in turn have likely been aided by offtake agreements which should take aggregate contract volumes to just under half of the 10Mtpa (million tonnes per year) expected from stage one production. More would help: in terms of agricultural customers, Brazil and Europe remain the two big prizes, and chief executive Chris Fraser told us his role “involves a fair bit of flying at the moment”.
But with banks’ balance sheets unlikely or unable to shoulder all the funding shortfall, that could leave a $2bn gap for the government to underwrite, in the form of a Treasury guarantee. Mr Fraser is quick to point out that this will not leave taxpayers on the hook – unless of course something goes seriously wrong – but will instead put the government on the same terms as commercial lenders. Those terms include a 6-7 per cent “all-in” interest rate, and bonds with a maximum bond maturity of 16 years.
Recruiting the government to this colossal industrial project is now arguably the biggest obstacle on Sirius’s horizon. At a local level, cross-party political support surely can’t hurt. But then predicting the UK government’s business policy in the current climate is anyone’s guess.
Fertile investments
One by-product of Sirius’s listing has been a renewed appetite for potash miners in London. And after two years of low commodity prices, there are sufficient numbers of investors who believe that counter-cyclical investment now will be well-timed to an expected shortfall in fertiliser feedstocks from 2020.
In March, we had the Aim debut of Kore Potash (KP2), developer of the Kola project in Congo-Brazzaville. Last month brought two potash-themed equity placings: £9.7m for Brazil-focused Harvest Minerals (HMI), and £6m for Emmerson (EML), owner of the Khemisset asset in Northern Morocco. Other active potash miners with London listings include Salt Lake Potash (SO4) and Premier African Minerals (PREM).
Most significantly, in terms of its project scale and advancement, is Danakali (ASX:DNK), developer of the Colluli potash project. The Australia-listed group – whose shares are expected to begin trading on the market’s main board next week – claims Colluli will, on completion, occupy the bottom 15 per cent of the global cost curve for sulphate of potash. Grades are world-leading, mineralisation is shallow, routes to market are short, and Eurochem is happy to buy up to 100 per cent of production. Numis reckons free cash flow could hit $1.6bn in the first 15 years of operation, all for an initial capital outlay of $302m.
Having struggled to attract sufficient attention in Australia, executive chairman Seamus Cornelius believes London can fulfil its reputation as the unmatched source of equity and debt for African mining projects. He is also happy to ride the coat-tails of the market’s largest potash prospect. “Sirius have done a tremendous job, and their presence and profile here gives us an opportunity,” Mr Cornelius told us. With a market for Colluli’s product already established, Danakali could even claim to have the jump on Sirius in one key regard.
Such bullish promises and plans are complicated by the project’s location: Eritrea, an authoritarian state whose policy of indefinite conscription has left millions of citizens in misery, fuelling the refugee exodus north towards the Mediterranean. At the very least, it raises questions of Numis’s observation that the government “appears to be supportive of [Danakali’s] process of social engagement”.
Yet with remarkable timing, Danakali announced its listing plans just as Eritrea and Ethiopia declared an end to two decades of war. The big hope now is that the economic, social, security and political situations will all improve, and in resuming diplomatic ties with its giant southern neighbour, Eritrea will finally emerge from isolation.
Undoubtedly, that boosts Danakali’s hand in the upcoming financing, which Mr Cornelius expects to comprise up to 70 per cent debt. The rate of borrowing has been modelled at an ambitious Libor “plus a high-single digit premium”.
Mexican standoff
That might seem doubly ambitious, judging by a recent debt fundraising for Bacanora Lithium (BCN), whose Sonora project in northwest Mexico is expected to sit in the lower half of the global lithium carbonate cost curve. At the start of this month, the company signed a $150m senior debt facility with finance house Red Kite, on what were described as competitive terms.
Analysts at Numis disagreed (or were unaware of the market’s definition of competitive). The facility is split into two tranches of Eurobonds: the first a $138m bond with an interest rate of Libor plus 8 per cent, the second a 20-year, zero-interest note which will be repaid with reference to monthly production of lithium at a rate of $160 per tonne produced.
Numis believes the two bonds carry effective interest rates of 12.9 and 22 per cent, respectively, stating that “while it is positive that [Bacanora] has secured this debt, both bonds, and especially the second, come at a higher cost than we had envisaged”.
The perception that this was expensive money may have served to cast doubt on the price at which equity investors are willing to fund the project. This week, backed by $90m of investment commitments from Oman’s sovereign wealth fund and existing shareholder Hanwa, Bacanora launched a $100m book-building exercise designed to “meaningfully progress” the project. However, getting Sonora over the line to phase one production of 17,500 tonnes of lithium carbonate a year will still require a further $120m by April 2019.
It all feels a little messy, not helped by a lack of detail on the placing price. Since the fundraising was announced, the shares slid 20 per cent to an assumed placing price of 65p – around a third off a month high.
Analysts at Liberum suggested the lack of clarity on future dilution reflected the difficulties of securing finance for lithium projects that are “technically difficult, have a recent poor track record of delivery...and whose returns are ultimately a function of lithium pricing where there is huge variation in long-run and short-run forecasts”. And so it proved. Just two days after announcing the placing, Bacanora pulled the plug on the equity raise, citing "current volatility in global commodities markets".*
Still, one can argue that both product and project are vindicated by off-take agreements and the $240m in debt and equity agreed so far. What is less clear is how much of a cut existing retail investors will be asked to take. Then again, the real risk capital is yet to be committed, and a 65p placing would not be a terrible result; Liberum reckons Bacanora’s net present value could be 165p at a long-run lithium price of $14,000 per tonne. Assuming the execution is flawless, lithium bulls still have hope.
Strength in numbers
Each of these situations highlight the impasse facing the industry: how to match a nervy investor base with the need to invest in future growth. To this end, Anglo American (AAL) may have shown the way. Last month, the group sold an additional 21.9 per cent equity interest in its Quellaveco copper project in Peru to Mitsubishi, for $600m. The sale, which brings the Japanese car giant’s ownership of the project to 40 per cent, will pre-fund a portion of Anglo American's capital outlay for the development of the mine, and steps up Mitsubishi’s strategic bet on the red metal. Given the co-ownership structure of many of the world’s largest resource projects, other miners may determine that strength in numbers is preferable to jittery capital markets.
*This online version of this article has been updated to reflect the update to Bacanora's financing.
