A natural hedge?

An IC analysis of equity fundraisings in the mining sector since the start of 2016 suggests a growing proportion of capital is being directed toward multi-commodity projects. During the period, and excluding rights issues and cash placements, 22 out of the 51 times when more than £2m has been raised in London have involved multi-metal deposits or projects. Exclude Sirius Minerals’ (SXX) successful £370m placing and open offer at the end of 2016 - by far the largest mining financing in the period - and a third of the £482m was raised for projects in the multi-commodity bracket. In the year and a half to December 2015, such developments attracted just £23m of the £552m raised.

The copper-gold rush 

Within these statistics is a defined theme. With some notable exceptions – including tungsten and tin producer Wolf Minerals (WLFE), prospective nickel-copper sulphide miner Amur Minerals (AMC) and Philippine gold-molybdenum project operator Metals Exploration (MTL) – the majority of projects attracting money offer exposure to deposits that include significant quantities of both copper and gold. Among them are Georgian Mining (GEO) Rambler Metals & Mining (RMM) and Kefi Minerals (KEFI). Chief among them, however, is SolGold (SOLG), majority owner of the Cascabel exploration tenement in Ecuador.

The company’s success – and nosebleed-inducing share price rise – is down to its world-class run of drilling, which has revealed some of the richest copper-gold ore bodies ever discovered, at intervals of over a kilometre, although no full resource estimate has yet been provided. We have previously argued that resource validation is not an issue, as big boys Newcrest International (Aus:NCM) and Guyana Goldfields (Can:GUY) have both bought into the project. Even BHP Billiton tabled an earn-in investment offer last October. But as SolGold acknowledges, Cascabel does not have an initial mineral resource estimate, preliminary economic assessment, or even a pre-feasibility study. Even if we assume the resource will be on a par with Rio’s Oyu Tolgoi operation, translating a fog and jungle-covered deposit into a major open-pit development is a major political and technical undertaking. 

Still, SolGold is a company that resources investors are being asked to take seriously. Last week, the company applied to move its shares from Aim to the main market, which it described as a “more appropriate platform” for its size and growth ambitions. Share price liquidity was also cited as a reason for the switch. However, we expect the most likely benefit will be a prominent spot in the shop window. With the largest (and most technically sophisticated) miners’ M&A budgets starting to swell once more, we wouldn’t be surprised if SolGold receives a takeover approach before long.

SolGold drill intersections

Recent transactional activity also provides a guide. At the beginning of July, commodity royalty business Sandstorm Gold (CA:SSL) formally completed the £167m takeover of Aim-traded Mariana Resources. The deal gives Sandstorm a 30 per cent stake in Mariana’s gold-copper project in eastern Turkey, known as Hot Maden. Like Cascabel, Hot Maden is still at the pre-development stage, although drilling strikes, including a 69.6m interval of 62.7g of gold per tonne and 2.68 per cent copper, show why Sandstorm was keen to take the company out, even if it came at an 84 per cent premium to Mariana’s share price at the time of the initial offer in April.

What’s the hedge?
We’ve recently commented on the outlook for the yellow metal, whose price we think will continue to be supported by geopolitical tension and central banks’ awkward transition to tighter monetary policy. Copper miners are also having a good year. Prices rallied 7 per cent in the first of 2017 due to supply disruptions, better-than-expected demand from China and a softening dollar.

Whether or not those factors persist in the short term matters less for the projects highlighted here, most of which are tied to the long-term outlook for copper. And beyond 2019, it’s hard to find a lot of bearish sentiment. The consensus view is as follows: fading mine supply growth and steadily declining grades will lead to a market deficit by the end of the decade. Until then, shortfalls may be masked by a robust scrap market. And while demand is still heavily dependent on Chinese economic growth, a looming consensus on the inevitable march of electric vehicles has added to analysts’ estimates for annual consumption over the next decade.

There are strong reasons to think both gold and copper prices will rise with time; crucially, for the copper-gold miners, these reasons are not the same.

A case study

Rio's copper-gold plays

Rio Tinto (RIO) may not be known as a miner of precious metals, but a glance at some of its largest projects past and present clearly show that it has long sought a gold hedge to its copper output.

In 2016, the diversified commodities group mined around 294,000 ounces and refined 135,000 ounces of the yellow metal, generating revenue of $608m in the process. Its reserves are also significant. Through its share of its operating and development projects, the commodities giant counts 17.9m ounce of gold, which is greater than the attributable reserves on the balance sheet of Randgold Resources (RRS), London’s largest gold miner by market capitalisation. Admittedly, almost two-thirds of these reserves are locked in Rio’s enormous Grasberg copper-gold joint venture with Freeport McMoRan (US:FCX), which has been repeatedly hampered by disputes over Freeport’s right to operate in Indonesia. The mine is also in its fifth month of industrial action, and Rio's investors will be alert to the possibility of heavy impairments on the project, or its potential abandonment, if a solution cannot be found between Freeport and Indonesia.

Still, within Rio’s portfolio are other examples of the group’s preference for so-called copper-gold porphyry deposits (which also collectively hold around 130m ounces of silver, worth some $2.2bn at today’s prices). Through its subsidiary Kennecott, it owns the Bingham Canyon open-pit mine in Utah, so large that it was designated a national historical landmark in 1966. On an equally grand scale is the Oyu Tolgoi project in Mongolia, sitting on China’s doorstep. Last year, Rio approved a $5.3bn underground expansion to the mine, which should provide access to grades of 1.66 per cent, more than three times higher than the ore found in the open-pit. The mammoth construction, which involves digging 200km of tunnels and at its peak in 2018 will involve 3,000 workers, is expected to pave the way for first production at the end of the decade.