Mines and Money spoke with Tim Markwell, manager of African Funds at Lion Manager, an early stage equity investor in resource companies that have advanced exploration through to operating mines.
Ahead of his appearance at Mines and Money London, we spoke to Tim about the most favourable countries for African investment, what key questions and criteria he uses to assess the investment potential of mining companies and what mining companies should be doing to attract the attention of resource investors in the current capital raising environment.
Podcast: Tim Markwell on Investing in African Mining Projects
M&M: At Lion Manager, you are focused on investments and explorers and producers specifically in Africa. In your view, which African countries currently have the most favourable investment environment, and which mining countries, for reasons of potential political risk, tax regulations or otherwise should investors be avoiding in the immediate future?
TW: The countries that we have a strong preference for at the moment are ones where there’s a proven track record of project delivery, like I said, in an exploration sense and being able to have perspective, but also you want to see a track record of mines being successfully financed and built and delivering on full-cost production.
The countries that really are ticking a lot of boxes at the moment are the ones that have been doing it for a long time. The Ghanas and the Tanzanias, where there’s a history of mining and gold mining in South Africa and Namibia.
Then there’s the more up and coming countries that are showing that they can also challenge these sorts of the industry in terms of delivery of new products and where there’s a lot of growth. We’re seeing that in countries like Burkina Faso, certainly, where there’s a string of gold mines that have come on stream and are coming on stream – you’re also getting new discoveries being made. And then countries like Senegal are fairly close by. And Morocco is another one that we quite like, given that it hasn’t had any of the issues of the Arab spring that some of its Arab neighbours have had in Northern Africa. You also have quite a perspective geology and supportive government.
So, that would be the areas that we’re sort of focusing and targeting. We don’t want to be a pioneering group where we’re battling new frontiers. We draw the facts in countries where there has been some delivery of it before and there continues to be and that you’re able to get engineering firms in there effectively and the bank is prepared to finance you, so that’s really where we’re targeting.
In terms of less favourable destinations, they’re a little bit easier. You just have to read the newspapers to find out which ones we’re not going to invest in.
We don’t really want to invest in countries where there’s instability of government, obviously, from where there’s coups or threats of coups. There’s a fairly obvious example of that, just in the last couple of years, where you have your Libyas and your Egypts and some where there’s just a fairly dynamic situations, where banks and engineering firms aren’t really going to send people. You do need that political stability. We’re not really going to go in there and reinvent the wheel and risk capital where it can all be taken away in an instant.
M&M: What about from a tax regulation perspective? Are there countries currently looking at new tax frameworks?
TW: That’s certainly been quite a big thing as the China mining boom sort of took hold. You saw countries quite rightly see government companies make quite a lot of money and on sell projects with quite high profits. Countries have been quite disadvantaged, and clearly saw that there was revenue to be gained by changing tax rules for the mining industry. There has been cases of royalties and rule changes that have adversely affected mining companies and that is obviously a big concern to groups like us.
One of the key things you’re looking at when you make an investment is stability, especially in terms of political parties, but then in terms of the fiscal regimes, because you’re investing based on a set of the fiscal parameters and if they change, everything changes, and perhaps the project might not be viable anymore and that can ruin a good investment. There are countries with very favourable tax for mining companies, some are Morocco and Tunisia which have very favourable tax regimes.
In terms of West Africa, you have, you know, Burkina Faso has been able to attract a lot of investment because they have fairly positive fiscal terms. So there are good examples there and then the obvious examples where things are tentatively sour in that regard, are countries like Zimbabwe where the government’s taking things, but then are essentially threatening to actually confiscate projects and that’s the ultimate hazard of investing in countries if there’s a threat of nationalisation.
M&M: If you’re going through the process then of considering investment in a particular mine project in Africa and in your role focusing in African mining projects, is there a unique sense of questions that must be asked which differ if you’re looking at projects in other jurisdictions?
TW: Not really, I think [the same questions] can apply anywhere. If we’re looking at a project, the first question we want to ask is who are the people involved in the project and what are their skill bases and have they done it before. That’s really the fundamental part of the business, the team and the people that you’re going to be backing, then the other one that goes hand in hand is that is their project any good or does it have a lot of potential to grow into a good project with a bit of brain power and funding and money, because it’s what we’re all about, giving people funds to use their experience in hopefully prospective geology terrains in countries that support mining. You want them to work it hard and create value for everyone.
The key ones are the skills and the team of people, the geologic prospectivity, is there a good geology story behind it and does the country support and look after you and make sure that they provide a stable regime that allows funders to come in and back the project into production, because every investment we make, we’re looking at backing things that turn into mines. Our shareholders of our fund are looking for things that they can help develop into projects for the country’s benefit and the shareholders’ benefit. They’re the fundamental questions we ask about any new project or new country that we enter into.
M&M: Looking at that from another perspective then, if you’re a junior miner and you’re looking to raise funds in the current capital raising environment, what should be the top priorities of management tames to make sure that you’re attracting the attention of investors?
TW: I think the company has to have a very sound strategy if they do raise funds and they do get a group like us to give the money and how are they going to put it to work and what’s their strategy to deliver upside. It’s no point just asking for X million dollars and thinking it’s just going to fill a few holes and it’s all going to turn into a fabulous story. They need to show that they have a strategy to put that money to work in stages, how they’re going to deliver results, what are they going to do if the results aren’t quite what they expected how can they change their work program or their strategy to fix it and how are they going to add value.
You need to know their thoughts long and hard about the things that can go right with investment and also the things that can go wrong. When things go wrong either from a geological point of view, from a country point of view or from a market point of view you have to have the bases covered to show that you’re adaptable should things change. More importantly, you can deliver and add value to an investment. When we make an investment we’re making an investment because we’re expecting to be given the opportunity to put more money in should things go well.
You want to make sure they’ve thought about that and they can see along the timeline about whether it’s an unlisted company and you’ve given them some funds and they want to add some value, the idea is that hopefully on the track they’ll be listing on an exchange somewhere and that they’ve thought that through and priced the capital rising with that in mind, so that they can deliver a continued upside to the shareholders supporting as they go along a journey of hopefully discovering and building a mine.
M&M: Last week I spoke with Rick Rule, who’s also one of your fellow presenters at Mines and Money Australia. His assessment of the current market prices was right now is a ‘once in a decade opportunity to stock up on the best junior miners’. I wonder if you could comment on that and in your words, sum up the state of the current market in terms of mining stock prices.
TW: Well I think it’s a very good statement to have made. Prices have come back a long way. There are quite a few companies out there that are at cash backing or lower and a distressed time. We have seen a slight recovery, certainly in Australia, in the last week or two, but things are very distressed especially relative to where they were sort of over the last sort of year or two prior, where they’ll be still quite a strong recovery after the GFC and certainly stocks in West Africa. Gold stocks in West Africa were absolutely getting very highly valued. Now we’re seeing the opposite where companies with several million ounces are priced at relatively very low levels. Certainly if you look at the resource per ounce, but what the market’s really looking for now is rather than just raiding any company with ounces. They want to see that these ounces can be viable and that if someone was to back it into a mine it’s actually going to produce a margin that can pay back the capital and the return. We’ve had a period where gold mining companies globally have disappointed in terms of dividends and returns to shareholders. That’s got to be the focus now on reducing costs and creating margin and showing that gold products can deliver, so really the focus should be on grade first and margin as well. There are some lower graded projects that can still produce a very good margin just due to some of their parameters that will turn them into profitable mines. That’s what we’re hunting down. The ones that can be demonstrated to be high margin even at the lower gold process in more distressed markets.
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Tim Markwell is presenting at Mines and Money Australia on October 29 – November 1 alongside keynote speakers including Rick Rule from Sprott Global, Bert Koth from Denham Capital, Nolan Watson from Sandstorm, Kevin McElligot from Franco Nevada and Pan Guocheng from China Hanking.
Attendees will have the chance to assess and compare more than 50 mining companies, speak directly to senior executives to ask some of the questions Tim outlined above and hear where leading resource investors will invest their money in 2014.
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