Mines and Money London 2009 Report

Reports

There was a marked improvement in sentiment at this year's Mines and Money conference in London. The two-day conference and exhibition, which is organised by Aspermont UK (publisher of Mining Journal), saw sharply higher delegate numbers, and much more investor activity, than at last year's event.

The conference opened with a session addressing the state of global mining, and Eric Finlayson, head of exploration for Rio Tinto, sought to find a solution to the perennial question of where the next mines were coming from.

Mr Finlayson focused on copper as a proxy for the whole of the mined-commodity spectrum, reflecting that while demand grows predictably over a long period, the price during that period is dramatically variable. He noted that short-term speculation on commodity prices exacerbated fundamental changes in metals prices driven the balance between supply and demand.

Mr Finlayson looked at where discoveries were likely to be made in future, noting that average grades have fallen over the past 20 years, owing to depletion of higher-grade surface enrichment blankets.

These high-grade, surface mines were unlikely to be discovered in future in mature mining districts, but were possible in emerging, or frontier countries. The problem, he suggested, was the risk/return required by "nervous investors" in backing projects in these unstable, corrupt or resource-nationalist jurisdictions.

But he held out hope for future high-grade discoveries at depth in mature mining areas, presenting Rio Tinto's Bingham Canyon copper operation in Utah as an example, where mining has been undertaken for more than 100 years. Mr Finlayson said he saw "enormous potential to buried mineralisation around open-pit mines", suggesting the concept would be a "fertile avenue for copper exploration for decades to come", extending the position in copper to the whole mining industry.

With an increasing proportion of underground production, prices were likely to increase, although he foresaw this being moderated by technical improvements in processing and mining.

Mr Finlayson also made a case for the group's exploration function, not something all major mining companies possess, noting that unwanted discoveries were sold to reduce the exploration cost of major potential new mines.

Michael Chender of Metals Economics Group noted that a year ago the concern of most involved in the mining industry was survival, but now it was over long-term supply and potentially "too high" prices. He pondered whether the world was at the start of recovery, over poised at the lip of a double-dip recession, but despite the timing of any upturn, there was concern over where future supply would come from.

Over the past ten years, the absolute value of greenfields exploration has risen, but the share of the total has been dropping steadily, which he described as a worrying trend, since the sector is the greatest generator of value.

Over the years 2000-07, worldwide exploration spending shifted from being dominated by major companies (double junior spending in 2000), to juniors representing more than half, and majors "barely 30%". During the past two years, the trend has reversed, but Mr Chender warned that junior companies were less effective discoverers of large projects, owing to an increasing tendency to develop small-scale operations, and observed the practice of outsourcing exploration to juniors was "fundamentally flawed".

Mr Chender considered what could help meet the challenge to find future reserves, mentioning advances in technology, both in exploration (remote-sensing finding buried deposits) and in processing (to lower operating costs, allowing currently-uneconomic deposits to become developed). Nevertheless, he warned if future exploration success rates were not raised sufficiently, development and production would rise inexorably.

The head of the International Finance Corp's business oil, gas, chemicals and mining development, Chris Goss, looked at the implications for the mining industry of global financial market conditions, saying the upturn since the crisis had been thanks to government stimulus. The US and China pumped 5% and 7%, respectively, into the world's financial system, with an enormous impact on the metals business, and Mr Goss suggested a certain amount of "cold turkey" was in store once those stimuli wore off.

The stimuli were also behind the continuing high engineering, procurement and management costs despite the global downturn.

As well as the problems outlined earlier for new discoveries in emerging countries, he observed that some new projects in other countries were extremely remote, requiring substantial infrastructure investment before development, and host communities were becoming more demanding, contributing further to higher development costs. While projects were possible in this environment, with the successful securement of a social licence to operate, the combination of these factors would slow the pace of global mining development.

Looking forward, Mr Goss foresaw supply constraints in some metals and considerable demand uncertainty in the short term.

Addressing volatility in metals markets, Vaughan Wickins of Standard Bank noted that the commodity sector has outperformed the general market over the past five years, and that the global recovery this year has been led by the mining sector. He described Standard Bank as being bullish on base metals, and very bullish regarding platinum. Although the rest of the precious-metals posed "more problems", he was still positive. With regard to the gold market, he noted that exchange-traded funds held more gold than China, at 1,700t.

Noting that in volatile markets the traditional motivating factors (greed and fear) really came to the fore, Mr Wickins came to two conclusions regarding investment in the gold market: either investors were rushing to safety; or there was simply "too much money chasing too few assets."

Mr Wickins suggested the right time to invest in commodities in these "unprecedented times" was after consolidation and a retracement to long-term averages. The Standard Bank team had identified three metaphorical "whistling canaries" in the financial markets that he hoped continued to sing: long-dated government-bond yields (at all-time lows owing to quantitative easing); the US dollar (although retraced most of last year's rally, not in free-fall); and the oil price (a moderate rise so far).

The past year has been particularly difficult for the junior sector, and they are "not out of choppy waters, despite continuously giving the best returns on investments". This was the view of Gervais Williams, head of UK small companies at Gartmore, who opened Tuesday afternoon's 'marketplace' session.

Small caps were "not hot" and "out of fashion", he said, with investors largely avoiding the sector in favour of buoyant larger caps, and the sector has seen substantial withdrawing of capital in the past ten years.

But a good small cap "can do so much more that a good large cap", Mr Williams said. He added that the smaller end of the market had provided the best results this year (the small cap index, including mining, is up almost 60% this year).

But, things are set to change, he believes. The sector went through a significant watershed in the past 12 months, bringing about an end to the credit boom and return to credit constraints.

"Capital raising are going to get more difficult with time," Mr Williams said, predicting that the sector is going to see a growing trend of larger companies buying smaller companies in order to grow.

Also presenting in the marketplaces sector, Lee Downham gave an update on Ernst & Young's recently released Wall of Debt report.

He repeated the view that the drivers for mergers and acquisitions were still in place but said that companies now realise how quickly the markets can change.

Merger activity was continuing, but equity had been used to record levels in 2009 as companies moved to recapitalise their debt. The subset of 63 companies studied for the Wall of Debt report refinanced US$30 billion of debt in 2009, Mr Downham said.

"The fundamentals are still there, and long-term growth in demand will continue," he said. But transactions will have to be equity and strategically driven.

The session also saw both the London Stock Exchange (LSE) and the Hong Kong Stock Exchange (HKEx) vying for investment.

The LSE had a remarkable performance this year, Nick Langford, head of primary market business developments said, with a large number of international companies moving to the bourse this year with secondary listing.

Initial Public Offerings (IPOs) have lagged behind counterparts in the US and Asia Pacific, but the exchange has a strong IPO pipeline for 2010. The AIM market had also been performing well, raising US$6 billion in further issuance, a record for the bourse.

Meanwhile, the HKEx, a "young baby", compared with Australia, London and Canada, had seen almost record levels of IPOs this year. The bourse is ranked first in the world for IPO fundraising, executive vice president Lawrence Fok said, and fourth globally for fundraisings, which totalled US$55.4 billion last year.

Resource companies currently on the HKEx have a total market capitalisation of US$324 billion, but represent just 15% of the total current market cap on the exchange.

However, the exchange is easing its rules for resource company listings. Hong Kong is trying to attract a potential 100 million investors from mainland China, increasing its lure for mining companies large and small.

Rounding off the first day of Mines and Money, presenters looked to the future fundamentals for the industry.

Jan Klawatter, head of metals and mining for the World Economic Forum (WEF), discussed the forum's recent work developing scenario's for the industry in 2030.

Projecting forward 20 years, Mr Klawatter proposed three scenarios.

The first, named Green Trade Alliance (GTA), saw a future world divided on environmental lines with countries being aligned either with the GTA or ostracised and global institutions becoming irrelevant.

The second scenario, Resource Security, proposed a clear focus on national self-interest and high levels of geo-political instability, while the final scenario, Rebased Globalism, saw economic power held by strong demand markets, with bilateral trade agreements of high importance.

While the scenarios were not intended as forecasts or as being prescriptive, elements of them were going to shape the future, Mr Klawatter said.

The next stage of the WEF process would involve chief executive roundtables to "look at what can be done to shape the future", and at strategic options to deal with these possible futures.

Sometimes, however, it is a good idea to take each day as it comes, Ian Henderson, manager of JP Morgan's Natural Resources Fund said, as he gave delegates his views on what makes a good investment.

"Projects don't change and the minerals in the ground are the same as always," he said, adding that investors should be aware of hype in the market. Hard assets, such as mineral resources, are popular today and will remain popular going forwards, he added.

Most of all, he said that it is important to be lucky – "I'd rather invest with someone who has been lucky rather than intelligent".

Peter Onley, from Golder Associates, opened the second day of the conference with a discussion on the pros and cons of private control of mining and associated infrastructure. He used the example of BHP Billiton and Rio Tinto's iron-ore rail in Western Australia to illustrate.

He said "The smaller operator; he is extremely grateful for the provision of infrastructure by government. It will undoubtedly get a greater number of small projects off the ground. Government will in turn benefit from greater revenue.

"If you're large enough and have got deep enough pockets, then you may well benefit from having no government infrastructure. You build it all yourself and take advantage of the monopoly and premium you can achieve through that ownership.

"The question of whether the total revenues to a country are achieved best by opening up infrastructure that's already owned by a private enterprise is yet to be examined, and I watch that one with interest, as I'm sure do BHPB and Rio."

The managing director of American Appraisal's Russian operations, Alexander Lopatnikov discussed the cost trends of plant, equipment and infrastructure when developing new mines.

"Despite all the volatility in the markets and uncertainty about the future, costs behave steadily and they're only growing, which will continue because of many reasons, including falling grades and less-hospitable jurisdictions for new mines and resource nationalism," Mr Lopatnikov said.

He added: "Where consolidation may not work, combination of assets is still possible and it may unlock significant value.

"In anticipation of the next boom in commodities to come, industry and regulators have work to do in order to eliminate measurement uncertainty in commodities.

Following on, Mike Hallewell, regional geometallurgical manager of SGS Mineral Services, said too many projects failed in the development stage, and this was partly due to a focus on grade when in mining and processing, instead of the grain size and variability of ore.

He said: "The traditional approach employs geology, metallurgy and mining, it always will do. The problem in the past 20 years is that these three disciplines have never been employed together sufficiently – they're dealt with in isolation.

"The industry is also focused heavily on grade as a key protocol for sample selection and metallurgical campaigns. This is a very simplistic approach.

"Projects very often failed because of a lack of understanding of how production and infrastructural costs requirements are linked to mineralogy texture. The point I make here, is that grade has been a very controlling parameter and we need to break that."

Rounding out Wednesday's morning presentations was the chief executive officer of Equinox Minerals Ltd, Craig Williams. He talked about how the company worked with the Zambian government to reach mutually-beneficial infrastructure outcomes for its Lumwana copper mine.

Mr Williams said: "Road access was really the critical thing that we needed in the first place. Those highways are essentially government responsibility. We had to encourage them to get the roads to the level that we needed. I'm pleased to say the Zambian government has done a pretty good job of that, indeed part of the development agreement is that it's the government's obligation to maintain the road."

Regarding power, Mr Williams said: "The nearest grid power was Solwezi [65km away]. That was a partnership with the government utility where we paid half of the capital cost of extending that line in exchange for attractive power rates over a 15-year term."

The second session on Wednesday featured four presentations with a focus on protecting personal and corporate reputations.

Andrew Fairburn, a director of the Regester Larkin consultancy, told delegates not to worry about being liked. He insisted that this was the "wrong matrix". Worry, instead, he stressed, on being trusted. Mr Fairburn commented that "by-and-large", being liked comes anyway if you are trusted. The important thing, he noted, was that you are more likely to make better business decisions if you are seeking to be trusted, rather than liked.

Regester Larkin advises on all sorts of 'nasties' that can affect corporate reputation. Mr Fairburn said that non-governmental organisations have recognised that companies are most vulnerable to attack when they are seeking finance. However, companies should continue to take long-term decisions.

In particular, companies should prepare for a crisis. This must encompass operational preparation and communication plans. Companies should not talk publically about implications for the share price. Far better is to focus on doing "the right thing", which will often be the best thing anyway for the share price.

The most serious issues for corporation reputation are the ones that creep up slowly, rather than sudden disasters. The mining industry, generally, is very good at coping with climatic accidents, etc, but is much less able at managing long-term issues.

Mr Fairburn said that when defending head-to-head debates, companies will never do better than draw. Exploration and mining companies should be proactive, and try and drive the agenda by taking the initiative and actively managing risk.

Mitigating social risk was explored by Ed O'Keefe of Synergy Global Consulting. He noted that there had been an increasing focus on business value, especially in 'business critical' areas (such as operations in areas of military conflict).

Like Mr Fairburn, Mr O'Keefe said that it was important to manage risk. Although it was previously only the major companies that had this capability, the smaller companies are increasingly learning to cope. Indeed, Mr O'Keefe said that the junior companies have taken the lead in managing social issues at exploration sites. He described them as being "really creative", although he conceded that there is still a reticence in putting corporate 'heads above the parapet'.

Mr O'Keefe noted that there are a "whole suite" of guidelines and standards for companies to follow, and this includes increasingly rigorous guidelines from the OECD and IFC standards that are currently being reviewed. He stressed that the most important thing is for companies to learn from their experiences and to communicate with stakeholders as early and as frequently as possible. For that reason, community-relations skills are of increased importance.

Tommy Helsby admitted that he knew little of mining but, as head of EMEA (Europe, the Middle East and Africa) for Kroll, is an expert in investigation. After outlining some of the reasons for corruption (which centre on the concept of a 'resource curse'), he outlined some of the new initiatives to address the problem.

Mr Helsby talked of a "band wagon" of government initiatives, most of which have "real teeth". These are mainly designed to break the cycle of corruption, and make the cost of transgression as too high to make the risk worthwhile.

Until recently, mining companies had been able to avoid the problem because it was frequently explorers who were paying the bribes, but had been acquired by larger companies before the issue emerged. This escape route has now closed, and buyers are now vulnerable.

Mr Helsby described corruption as a communicable disease; it can be caught by hanging around with the wrong people. It can also spread from explorer to miner. It also gets worse the longer it is left untreated.

The simple question, according to Kroll, is "are you ready to be good?". Mr Helsby commented that you can't be "quite good". He told delegates that "whilst it might be better to be hung for a sheep than a lamb, it is better not to be hung at all".

Accountability is the key, and having as many people involved as possible. Mr Helsby argued that the mining industry can make a difference, warning that "if you don't, someone else will, and it will be at your expense".

The final presentation in the session was by Ian Duncan, a managing associate with Simmons & Simmons. Mr Duncan looked at the legal issues and losses caused by reputational risk. He stressed the need to get lawyers in at an early stage to establish appropriate operating procedures, and to ensure that tight control was maintained over contractors, and any other third-party workers.

Interestingly, while the first speaker, Andrew Fairburn, had stressed the need to be transparent, Mr Duncan talked of measures to achieve the opposite. He outlined several confidentiality and arbitration clauses to keep some issues from becoming public.

The last session of this year's Mines and Money opened with a presentation by Greg Mulley, a partner with Herbert Smith LLP's Global Mining Group.  Mr Smith focused on issues relating to raising finance, and noted that the weakness of the dollar has contributed to difficulties for companies without currency hedges. In particular, he warned that cost bases were "not appropriate for the new operating environment".

Mr Smith looked at the differences in IPO and secondary issues, and the reasons for recent capital raisings. He identified as key issue the reporting of ore reserves and resources, and the maintenance of sufficient working capital.

The conferences penultimate speaker was Nicolas Clavel, chief investment officer of Scipion Mining & Resources Fund. Mr Clavel talked of the "strong investment opportunity" offered by the junior mining sector, and explained the options by looking at case studies. Scipion's investment proposal is to invest in junior companies that have completed geological studies. Scipion will then provide the necessary debt to bring the project into production. He focuses, he said, on "projects that fall below the radar screen of traditional lenders".

Anthony Desir, principal of SAMI Fund, closed the conference with a look at China's investment approach to Africa. He explained the investment process in China, and how African risk is perceived in the country. Mr Desir outlined the relationship between China and Africa, and how each party is looking to benefit.

He told delegates that Chinese investors have not yet demonstrated the skills to manage complex non-domestic investment transactions in heavily regulated international markets. Mr Desir warned, for example, that dealing (from strength) with power brokers is a way of the past, and that China’s engagement with weak and unstable governments will backfire when these governments inevitably fall.

Mr Desir said that China's business leaders have "still not adjusted to doing business in places where the democratic government is the functional process".

Meanwhile, the Chinese have been reluctant to engage foreign professional advisers to help manage investment transactions on their behalf. One of the reasons for this is that China's emerging business leaders (many of whom were educated in the West) are still at least ten years away from achieving power.