Mining PDF

Forecast

Innovation

Rich pickings?

Moon shine View from the top

Will the price of metals continue to rocket

Sky’s no limit according

or are they heading for a fall?| Page 5

to canny entrepreneurs | Page 8

Profile

Investment

CEOs of worldwide mining giants lay their cards on the table | Page 9

business-reporter.co.uk

Cashing in Is it time to go all in on mining funds? | Page 13

May 2012

Distributed within the Sunday Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents

Raging bull

China charges ahead in the scramble for African resources, but is it exploration or exploitation? Page 11 A special report on mining

Business Reporter 路 May 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Business Reporter · May 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Like us: facebook.com/business-reporter

Mining – in this issue

Find us online: business-reporter.co.uk

3

A new seam of profit?

From mega mergers to competition for resources, Business Reporter looks at the investment drivers behind the booming mining industry

By Andy Rosenbaum

Publisher Bradley Scheffer brad@lyonsdown.co.uk Managing Editor Lucie Carrington lucie@lyonsdown.co.uk Editor Andy Rosenbaum Production Editor Amy Dickson amy@lyonsdown.co.uk Production Assistant Fleur Hollett fleur@lyonsdown.co.uk Project Managers Matthew Hill matthew@lyonsdown.co.uk Lee Robertson lee@lyonsdown.co.uk For more information on any of our supplements please contact us: Telephone 020 8349 4363 Email info@lyonsdown.co.uk Online www.lyonsdown.co.uk

business-reporter.co.uk

Supporters

Everyone agrees that mining is thriving. It’s the consequences they can’t seem to agree on.

The commodities boom, which includes products from mining like oil, copper, gold or tantalum (used in mobile phones), is unlikely to turn to bust. On the contrary, a quick glance at the numbers suggests that it is set to continue for a long time.

First, there will be 9 billion people on Planet Earth within 40 years, according to the United

9bn

population of the world in 40 years Nat ion s Popu lat ion Division.

Second, they will be richer: in 1950, more than 40 per cent of people lived below the poverty line, whereas less than 25 per cent do so today. And while we should rejoice at this statistic, it means that competition for resources is much greater. China now consumes more oil than the US and demand from new consumers throughout Asia is unlikely to ease off.

It should be no surprise, then, that commodities prices have risen steadily since 1965, and are predicted to carry on rising for the foreseeable future.

Yet a strange paradox seems to afflict mining stocks.

While there is huge demand for what they sell – and they are raking in cash – investors don’t reward mining stocks with higher prices.

The proposed merger of industry giants Glencore and Xstrata has given mining stocks a boost. If the deal goes ahead, it will create the world’s largest miner of zinc, the metal’s top trader, and one of the biggest zinc smelting companies. It is also likely to trigger a wave of consolidation in mining that will give stocks a further t.

For now, however, investors are still holding back.

“Although the proposed Glencore-Xstrata merger is helping to lift mining stocks, many of the cyclical natural resource stock valuations are still way off from their 2011 highs from last spring. Many are still considered to be in bear market territory [corrections greater than 20 per cent],” says Janet Yang, an analyst with researcher Morningstar.

“Yes, the price of gold is high. But mining costs are high as well,” warns Brett R ichards, CEO of the FTSE 250-listed gold m i ne r Avo cet.

“Good management of costs matters greatly in mining.”

Those in the industry

“Yes, the price of gold is high. But mining costs are high as well” – Brett Richards also blame the financial c l i mate of t he pa st year – particularly the European sovereign debt crisis overshadowing growth prospects – for investors’ reluctance to invest in mining companies. “We are emerging from a climate of fear,” insists Neil Gregson, manager of the JP Morgan Global Mining fund. “Expectations will change in the coming year.”

If he is right, the time is ripe for taking a close look at mining, what makes it tick, and what kind of profit expectations investors should have.

Sin city

Fearful of missing out on listings, London is relaxing strict regulations – causing governance issues. p5

Gain some clarity

There are big opportunities in mining, but can chiefs grasp the nettle? p9

Green machines

CEOs must deal with environmental and community pressures. p11

Driving a commodity

The demand for rare earths is rising.

Is the market geared for it? p13

Contributors Andrew Rosenbaum has been a London and Paris-based financial journalist for 15 years. He has contributed to Time magazine, Euromoney, The Daily Telegraph, and Financial News, as well as a corporate writer for several Fortune 500 companies.

Bill Hinchberger is a Paris-based writer and founding editor of BrazilMax.com, an online travel guide. He served as a foreign correspondent in Brazil for The Financial Times and Business Week. His work appears in publications such as Africa Renewal and Foreign Policy.

Susan Milligan was national political correspondent for the Boston Globe for many years. She has been a fellow at Harvard University’s Institute of Politics, and contributed to the book Last Lion, a biography of the late Senator Edward M. Kennedy.

Business Reporter · May 2012

4

an independent report from lyonsdown, distributed with the sunday telegraph

Industry View

Find us online: business-reporter.co.uk

Follow us on twitter: @bizness reporter

Breaking new ground A gold mine in Armenia is aiming to benefit local communities through infrastructure improvements, training and education, as well as jobs The story of Lydian International and, in particular, Amulsar in Armenia began in 2005 with Dr Tim Coughlin – now the CEO – driving down a road in Armenia. He spotted what is now Amulsar, applied for and was awarded an exploration licence and the first gold chip samples were collected during 2006. No previous exploration for gold had occurred on this site or in this area.

In 2007, Lydian advanced the Amulsar project to scout drilling stage by conducting mapping, soil sampling, trenching and rock-chip sampling.

January 2008 saw the company float on the Toronto Stock Exchange and the resource has been growing ever since. The recent resource update reported 2.1m oz at 1.0g/t in indicated and 1.1m oz at 0.9g/t inferred category.

Lydian is now conducting a bankable feasibility study which is expected to be complete before the end of June. Once it is done, the remaining permitting will follow.

“We expect to go to the debt and equity markets and say we need around $220m (£139m) to build the mine,” says Coughlin.

“We aim to start production in late 2014 and extract 123,000 ounces in years one to three, ramping up in year four to 256,000 ounces of gold. The mine life will depend on how big the

resource gets to but we expect in the end it will be around 15 years.”

Amulsar is 176km south-east of the capital Yerevan, down a sealed road.

“The close proximity of infrastructure required to build a mine, including highway access, commercial high tension power lines, commercial gas pipe, water and telecommunications are all within reach, helping to make the project viable and cost effective,” Coughlin says.

He is particularly proud of the relationship that Lydian has built with the surrounding communities. “There are three towns within 8km of Amulsar: Gorayk, Saravan and Gndevaz with 1,400 residents between them. None of these towns will need to be relocated and they have benefited from a number of social projects such as provision of a gas supply, building repairs, regular waste collection, sponsorship of a primary school teacher, road repairs and donation of a chlorinator to improve local water quality,” says Coughlin.

There are initiatives in place to employ large numbers of the local population at Amulsar.

“There are approximately 130 individuals employed during the peak season at Amulsar and once the mine goes into production in 2014, this figure will rise to between 300 and 500,

Exploration project in Armenia

depending on the number of job shares,” says Coughlin. “We have helped to stop a pattern of migration of working-age males from the local villages and already have some guys on education and training programmes.”

Lydian International’s main shareholders are the International Finance Corporation, part of the World Bank Group, a shareholder since 2007, and the European Bank for Reconstruction and Development, a shareholder since 2009.

Both provide influential in-country support and valuable advice to manage environmental, social and governance risks.

The team at Lydian were privileged to receive the outstanding achievement award given

Is copper losing its touch?

Copper’s reflection of western economic growth has faded, due to increasing market uncertainty and speculation alongside rising of demand from Asia L o n g a g o , c o mm o di t y investors endowed copper with an honorary doctorate in economics.

It was said that copper was almost incomparable when it came to predicting the level of economic growth in the western world. And understandably so – the metal is used in

everything from telecommunications to construction.

But since the middle of the past decade, its predictive powers have started to wane. Indeed, some experts such as Simon Hunt of Simon Hunt Strategic Services have stripped the red metal of its title altogether: “Dr

Copper retired in 2005,” he says.

For Hunt, the reasons behind this are two-fold: the first is the increasing input of investment and speculation into the market and the second is the rise of demand in Asia, particularly China.

Speaking to Mineweb last year,

for notable exploration success presented at the Mines and Money conference held in London last year. The awards have been established to honour individuals and organisations who have made a significant contribution to the industry.

So, what’s next? “To get the mine producing in the most efficient and socially responsible way,” says Coughlin.

“We intend to add more ounces this year with a 25,000 metre drilling programme, we will complete the feasibility study and get the final permits and undertake a detailed engineering study all before the end of this year,” he says. www.lydianinternational.co.uk

Hunt said that this “financialisation” of commodity markets, including copper, has led to a disconnect between demand and consumption.

According to Hunt, the financial sector has acquired very large tonnages of copper, which are warehoused outside the reporting system not only in China but throughout the warehousing structure of the London Metal Exchange (LME). This became clear in 2011 when an expected, significant supply deficit failed to materialise – in large part because of China.

The Asian giant currently accounts for around 40 per cent of global copper demand and is not a passive participant. Asia’s copper firms actively manage their stockpiles, buying more than they need when prices are weak, and using up their stocks when prices are high.

When prices were pushed to records above $10,000 (£6,307) per tonne in February 2011 by speculators banking on a deficit, China used up its stockpiles instead of buying in the market, so what should have been a deficit ended up as a balanced market.

It is worth pointing out that had China not had these stockpiles to fall back on, prices could have risen a great deal higher.

Matters are further complicated by the changes currently being implemented in China through its latest five-year plan. According to Nic Brown, head of commodities research

at Natixis bank, China is trying to move towards higher value-added and higher-technology production, particularly on the east coast.

Speaking on Mineweb’s Metals Weekly Podcast, Brown added: “The industrialisation and urbanisation development model that we’ve seen for the past few years will continue in the centre and west of the country. On the east coast there is more of a transition from a middle income to a high income country, so there will be a clear push towards higher value-added and higher technology products.”

T hat i s not to say C h i na’s policymakers are now satisfied with the level of infrastructure in the country – they still have a long way to go – but it does mean that we are seeing a slight move away from pure, heavy industry.

China is likely to remain the 800lb gorilla in the copper demand room.

But, there is every likelihood that demand will fall, just as growth in the country is also expected to slow.

As for Europe and the US, growth is likely to remain fairly weak.

Perhaps it is not copper that lost its predictive powers , but rather that the developed world ran out of room to grow.

Mineweb is the world’s leading provider of mining and mining investment news.

Geoff Candy is director of content at Mineweb.

Follow Mineweb on Twitter @Mineweb www.mineweb.com

Business Reporter · May 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Like us: facebook.com/business-reporter

A bright future for metals?

As the price of gold continues to impress – and other resources keeping apace, is it rich pickings for investors?

By Andrew Rosenbaum At the time of writing, the price of gold is holding at $1,730 (£1,074) – not far below its record high of $1,900 (£1,180), the price of copper close to a record $4 (£2.48) per pound, and the price of iron ore has recovered to close to $150 (£93) per ton. In fact, many metals, both precious and base, are near five-year highs.

The great question is: will it all go up, or is it heading for a fall?

Let’s start with gold, which is the most confusing. “Forecasting gold is like judging Miss Universe at an ugly contest,” jokes Neil Gregson, manager of the JP Morgan Global Mining fund.

“The factors driving up the price of gold have not changed,” says Clive Burstow who manages resource funds at Barings.

Certainly, as central banks pump more funds into quantitative easing, investors see gold as a safe store of value. It goes up and down independent of supply, but rather in terms of how the global economy is doing.

Golden forecast There are gold bugs and gold bears. Ben Traynor, who edits Gold News, is one of the former. He points out that the volume of gold bullion held to back shares in world’s largest gold exchange traded fund the SPDR Gold Trust (GLD) is at its highest level since 20 December. Purchases of physical gold by exchange-traded funds (ETFs) have been one of the factors driving up the price of gold. Also, if the ETFs are buying, it suggests that sentiment is still positive.

Burstow agrees. “I think the consensus is that gold’s going to remain strong for the next two or three years. It could well reach $2,000 (£1,242) by the end of the year,” he says.

The gold bears think that the price is already exaggerated, and expect it to fall back. Dundee Wealth Economics chief economist Martin Murenbeeld warns that investors have to watch for a stronger dollar, because that always puts pressure on the price of gold. The better economic data coming out of the US could well support a stronger dollar. And, now that the euro crisis is easing, investors could move into riskier assets away from gold.

Gold is, of course, one of the most difficult metals to forecast. Copper is easier to predict, because it is linked to the most vital economic processes – the metal is regarded as a leading indicator of the global economy. It

Bugs vs bears I think the consensus is that gold’s going to remain strong for the next two or three years – Burstow

Mining

Find us online: business-reporter.co.uk

Light on the horizon? Forecasting the future of commodities is notoriously tough is used in the construction of buildings, power generation and transmission and the manufacture of consumer electronics.

According to the International Copper Study Group (ICSG), worldwide growth in copper demand for 2011 is expected to

The gold bears think that the price is already exaggerated, and expect it to fall back have exceeded supply, with a production deficit of about 200,000 metric tonnes of refined copper expected for the year.

The ICSG expects a similar deficit in 2012, although supply may ramp up to equal demand next year.

So there is little chance of the price of copper falling back to lower levels in the near future. But copper has one downside: other metals, particularly aluminium, can be substituted for it. Substitution has accounted for losses of about two per cent a year in copper usage globally over the past three years, according to the International Copper Association, and aluminium accounts for about 50 per cent of that substitution. If the

Investors have to watch for a stronger dollar, that always puts pressure on the price of gold – Murenbeeld

price of aluminium drops, and the price of copper continues to rise, increased use of substitution could dent copper demand.

The high price of iron ore could also fall back rapidly, but companies aren’t betting on it. At the world’s largest miner, BHP Billiton, close to half of EBIT (earnings before interest and taxes) for the second half of 2011 was accounted as from iron ore, according to the company’s annual report.

BHP chief Marius Kloppers said the firm’s flagship iron ore business was in good health despite weakening Chinese demand and in an interview in February said it would take a “fairly big event” to knock expansion plans worth $29 billion off course.

An iron grip China consumes more than half of the entire global production of iron ore. Although the government recently made changes in banking regulations that raised hopes of more investment, the price of iron ore has held steady. Karl-Axel Waplan, CEO of miner Northland Resources, thinks that iron ore has hit a steady floor price, and that demand will be steady enough to push the price higher. This is clearly a tough call, though.

There are really no easy calls in resources forecasting; sometimes even oil, that most-watched and forecasted commodity, seems to have a life of its own. “There are a plethora of factors to consider in evaluating a mining company: geology, asset quality, management, and supply and demand are all factors to watch,” warns Chris Fraser, CEO of the British-based Potash mining company Sirius Minerals.

And then there is the global economy….

5

If you’re not on the list, you can come in Eager to develop, actions at some Londonlisted mining companies are leaving the door open to corporate governance issues Nothing is hotter in mining this year than central Asia with many firms vying to get a piece of the untapped resources in the region.

Firms are springing up around good geology, firms that have been able until recently to list on the London Stock Exchange (LSE) in a move that gives them very good access to capital.

But the “Mongolian gold rush” has played havoc with corporate governance rules. These firms, established quickly to enable rapid access to resources, are not all necessarily managed according to best practice.

One firm that gained a London listing was Eurasian Natural Resources Corporation (ENRC), a Kazakhstan-based producer of metals including iron ore, aluminium and ferrochrome.

The UK Listings Authority waived the usual requirement that 25 per cent of total shares be available for purchase when it gave ENRC a listing.

Diamond in the rough A number of such listings took place, based on the so-called “Rothschild model”, named after Nathaniel Rothschild who used it to take Indonesian miner Bumi public. Whether it was accomplished through a reverse merger (in which a shell company takes over the miner and gives it the qualifications for a listing), or through a different arrangement, the Rothschild idea was to take a diamond in the rough such as Bumi or ENRC and use the imposition of western corporate structure to polish it.

“Reverse mergers or similar procedures speed up the listing process,” says John Auerbach of Ernst & Young. “But they also impose risks. One hazard related to reverse mergers is that many companies that would benefit from the added scrutiny and transparency typical of the pre-IPO experience are not subject to such a process.”

But there was concern at the UK Listing Aut hor it y t hat London might miss out on these listings if the strict criteria Model: Nathaniel Rothschild

City fears missing out

were applied, so the authority issued waivers.

But all has not worked out as intended. Under the “Rothschild model”, these companies should have improved corporate governance after being listed.

Instead, at Bumi, Rothschild fell into a squabble with the company’s majority owners over corporate governance, and this has led to a dispute in which Rothschild was nearly ousted.

Using the back door At ENRC, the company was listed in 2008, but in 2011 the owners decided to throw out the three non-executive directors whose job was to protect minority shareholders.

These corporate governance issues have hurt the prestige of the LSE, and the Financial Services Authority (FSA) has come up with proposals to change some of the rules.

Jonathan Angell, of the London law firm Dechert’s securities group, says: “The proposals clarify the FSA’s approach to reverse takeovers.

The concern is that reverse takeovers may be used as a ‘back door’ to secure a listing of a business which would otherwise be ineligible.

“The FSA will require issuers to contact the FSA as soon as possible after a reverse takeover is agreed or in contemplation.”

Closing that back door to listings, or at least keeping a closer watch on it, can only be good for the London market.

And it leaves the door open a fraction of an inch so that such companies can still list when they qualify.

– Andrew Rosenbaum

Business Reporter · May 2012

6

Industry view

an independent report from lyonsdown, distributed with the sunday telegraph

Find us online: business-reporter.co.uk

Follow us on twitter: @bizness reporter

Supplying the demand From toothpaste to Teflon, fluorspar is essential to our lives.

But with demand rocketing and exports depleting, could Scandinavia be a beacon for investors?

A better future Developing a business in a fragile economy brings responsibilities as well as rewards. It’s all about building partnerships on the ground and unlocking local potential The impact of a major international business Perras, London Mining’s recently-appointed on a fragile developing economy can be almost head of sustainability. “We must not give the overwhelming. impression that we’ll do everything, or let the Last year, AIM-listed London Mining began community believe they can rely on handouts,” he producing iron ore at Marampa in Sierra Leone. says. “Sustainability means working with people It’s an old mine and, as a result of a civil war, to help them become self-sufficient. has been dormant for decades. London Mining “There’s no point building a school if the local expects production of 1.5Mtpa in 2012 and plans government has no money to run it. It’s much to expand capacity to 5Mtpa in 2013. Ultimately better to support start-up businesses with small the resource could support production of over loans, advice and contracts to work for the mine: 16Mtpa of high quality iron ore to supply the their prosperity will provide the employment global steel industry. and revenues that will enable the community “Marampa requires $2 billion (£1.26 billion), to flourish,” says Perras. which will be an enormous boost to the local and “An educated workforce will be vital, national economy,” says Graeme Hossie, London developing alongside the mine operations to Mining’s chief executive, “and over the next 25 provide for Sierra Leone’s regeneration”, Perras years we will pay significant tax and royalties.” adds. So London Mining is looking at launching This is great news for Sierra Leone, a scholarship for school, college and but it imposes great responsibilities university students and a long-term on London Mining, Hossie believes. vocational and skills training programme. Eventually even “The old model was for a foreign company to become the ‘only senior technical jobs at Marampa game in town’. Governments should be filled by Sierra Leone and local communities felt citizens which is empowering for excluded, and when the company local people and more efficient pulled out, a gap was left and the than importing foreign staff for regional economy could implode.” the company.

London Mining sees the Malaria is a major problem future differently. “Natural in Sierra Leone and currently Top and above: employees resource development, costs London Mining $120,000 and citizens of Sierra Leone particularly mining, is the (£75,000) a year in treatment fastest way to impact the development of a and absenteeism, so the company is working nation,” says Hossie. “Every job we create can with various stakeholders to tackle the disease. support many more, and our presence in Sierra Similarly, working to improve sanitation will Leone demonstrates to other internationals reduce the economic and social impact of that the country is a viable place to do business. water-borne diseases on the workforce and “But our operations need to be sustainable local communities. in the broadest sense. We want to help educate If this sounds like mutual self-interest rather and build indigenous businesses, sustainable than philanthropy, that’s because it is. “We believe agriculture and social and physical infrastructure in direct social and community investment and that will thrive after the mine is depleted in 25 we’ve allocated 1 per cent of our turnover to to 50 years.” it,” says Hossie. “That’s 10 times more than the This means working in partnership with many statutory requirement. stakeholders including national and regional “But corporate social responsibility isn’t government, local communities, NGOs and an expense. It’s an investment to protect and international financial institutions such as create value. In order to be truly sustainable, our the African Development Bank and bilateral operations have to support everybody involved development agencies such as UKaid.

– and we intend to make sure they do.”

The company needs to be a catalyst for change rather than the engine for change, says Claude www.londonmining.com

FluoRspar may not be a name that trips from every lip, but it touches all our lives. Open the fridge, brush your teeth or fry an egg, and the chances are you’ll be using a product that wouldn’t exist without it.

F luor spa r, or c a lc iu m f luoride, is the principal source of fluorine, an essential ingredient in many industrial processes. Around half of all production ends up in fluorocarbons, the refrigerant gases used in refrigerators, airconditioning units and so on.

Another 30 per cent is poured into steel blast furnaces as a flux, while the aluminium industry also relies on fluoridebased fluxes. Fluorine is also used in petroleum cracking, metal pickling, nuclear fuel manufacture, as well as making the fluoride in toothpaste and fluoropolymers such as Teflon, while the pharmaceuticals industry needs it for more than half of all new drug formulations.

Worldwide demand for fluorspar-derived products is rising, especially in the developing world, and the price has increased in the last decade from around $150 to a current price of $530 a tonne.

Roughly half the world’s f luorspar is produced in China. Ten years ago most was exported, but domestic demand has grown so much that exports have been cut by about 85 per cent, and the Chinese government is now restricting the issue of mining permits in order to conserve supplies.

Western Europe is the second

largest user of fluorspar after China, and in 2010 an EU study named it as one of 14 critical mineral raw materials that are likely to run into short supply.

“Sales of fluorine chemicals are at record levels and the dynamics are very favourable to western producers of f luor spa r,” say s Pat r ic k Cheetham, executive chairman of mineral exploration and development company Tertiary Minerals. “Buyers of fluorspar are particularly keen to find a

Western Europe is the second largest user of fluorspar stable source of supply, from politically stable countries with reliable infrastructure and good transport networks.”

Countries don’t come much more stable than Sweden and Norway – which is good news for Tertiary Minerals because the company has discovered large fluorspar deposits there and is now preparing to exploit them.

Storuman in north central Sweden is an established mining area with excellent road and rail links to year-round, deep water ports. Extensive drilling by Tertiary Minerals has confirmed large fluorspar deposits here, estimated at 28m tonnes of ore so far, with at least 10 per cent fluorspar content and “expectations are for a much larger deposit,” says Cheetham.

Groundwork: Patrick Cheetham of Tertiary Minerals

“The Swedish government has already classified the deposit as being of national importance, which gives it enhanced status for development.”

L a s s e da le n , 50 m i le s southwest of Oslo, also has very good infrastructure.

In January 2012, Tertiary Minerals confirmed a smaller but more concentrated deposit of 4m tonnes with 25 per cent fluorspar content.

Between the two locations Tertiary Minerals believes it is sitting on at least 4m tonnes of f luorspar. If all goes well, production at both sites should begin by the end of 2015 – probably around 100,000 tonnes p.a. at Storuman and 60,000 tonnes p.a. at Lassedalen. Extraction should be straightforward and capital costs could be recouped in as little as two years, says Cheetham.

Its present share price of around 6.2p gives Tertiary Minerals a market cap of about £7.4m. But detailed analysis by two brokers – Seymour Pierce and VSA Capital – has valued the AIM-listed company at nearer 30p per share.

“The value of our confirmed fluorspar deposits is equivalent to more than a million ounces of gold,” says Cheetham. “If our production targets are realised we shall become the largest fluorspar producer in Europe, and we’re one of the few publicly-quoted companies that offer investors access to this valuable mineral.” www.tertiaryminerals.com

Business Reporter · May 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Like us: facebook.com/business-reporter

Industry view

Find us online: business-reporter.co.uk

7

Ready for the gold rush After a successful first year of production, one mine in the fruitful region of south east Asia is predicting a bright future South East Asia has a long history of gold mining, embracing Indochina, the Philippines, Papua New Guinea and the Indonesian archipelago. Valuable discoveries are still being made, and one of the most recent mines to begin production is at Toka Tindung in North Sulawesi, Indonesia.

Owned by Archipelago Resources, an AIMlisted company based in Singapore, Toka Tindung reached full production last November and is expected to produce an annual average of 160,000 ounces of gold for at least the next six years.

“A year ago we were predicting a six-year mine life followed by a further three years processing low-grade ore. Now it’s nine years’ life, plus seven years of low-grade processing. Ultimately I think it is feasible we will mining there for 20 years or more. The potential for organic growth at Toka Tindung is tremendous,” says Marcus Engelbrecht, Archipelago’s managing director and CEO, who joined the company in 2011 after working with BHP Billiton and OceanaGold Corporation.

The gold-bearing ore at Toka Tindung is of good quality and easily accessible, with five open-cut pits to be developed. The topography is favourable, with good facilities for water capture, storage and treatment.

Security is good and the provincial capital Manado is little more than an hour away by

paved road. The mine’s safety record is also very commendable.

Thanks to all this, Toka Tindung is yielding up its production relatively cheaply. “Our production costs are only $540-590 (£334-365) an ounce,” says Engelbrecht. “This is a highly favourable cash cost when compared to many other peer companies.”

With the current gold price at $1,600-1,700 (£989-1,050), that makes Toka Tindung an ideal cash cow to fund expansion. Early cash flow could be further enhanced by investing in additional equipment to process the low-grade ore in parallel with the high-grade, rather than stockpiling it until mining operations cease.

Further near-site exploration drilling at Toka Tindung and early stage opportunities in Vietnam and the Philippines could also add to Archipelago’s reserves and production over the longer term. “We’re continuing exploration in the area and we believe there’s tremendous potential for increasing the life of the mine,” says Engelbrecht.

Archipelago’s strong management team also has considerable mergers and acquisitions (M&A) experience, which supports growth opportunities for the company. Engelbrecht says: “The region is well placed for consolidation, and with Toka Tindung in full production with such low overheads, we’re in a much stronger cash

Archipelago mining in Toka Tindung, Indonesia

position than many of our peers. We’re already one of the bigger players in the region, and there are massive opportunities for us throughout south east Asia, Australia and beyond. We intend to focus on M&A and we have board and shareholder support for this.”

Currently, 52 per cent of Archipelago’s shares are owned by Rajawali Corporation, the highly regarded Indonesian conglomerate. As a supportive shareholder, Rajawali has provided considerable assistance in dealing with a range of local issues.

The company says it has excellent relationships with federal and local government, and with the people in the 11 villages surrounding Toka Tindung, who provide much of the mine’s workforce.

Thanks to Archipelago all the villages now

have well-stocked medical facilities and clean running water, and the company supports numerous community projects from micro-loan schemes to fishing co-operatives and agricultural diversification.

It’s more than just philanthropy says Engelbrecht: “If people don’t see our operation as ‘their’ mine, we’ll never achieve everything we want to do.”

“Ultimately, we are interested in building value and returns for our shareholders and we are managing Toka Tindung with this in mind.

We remain focused on growing into a respected and regionally dominant mid-cap gold producer,” says Engelbrecht. +65 6535 3419 www.archipelagoresources.co.uk

Business Reporter · May 2012

8

an independent report from lyonsdown, distributed with the sunday telegraph

Mining

Find us online: business-reporter.co.uk

Follow us on twitter: @bizness reporter

If you want something doing...

Cash-rich miners are headed for a frenzy of deal making after all, why build a company when you can buy one?

By Susan Milligan Driven by a high appetite for growth report by Ernst & Young. Deals were and a heavy demand from developing bigger averaging $1 billion (£0.62 countries, the mining industry is in billion) in size, but there were fewer a deal-making mood, with analysts of them: Total deal volume dropped predicting further increases in mergers by 10 per cent over the same period, and acquisitions in the coming year. as smaller miners had limited access to The proposed Glencore-Xstrata loan capital, the report says.

But today even the juniors merger is just the tip of the iceberg, analysts say.

– that is mining firms that T here is always have not yet started production – have demand for metals, even more cash on their in nations where growth has slowed somewhat, balance sheets, and all according to Richard miners are struggling W hittall, president for positions in the and CEO of Newstrike developing world. Deal Capital, a Canadian-based volume is expected to exploration company Whittall: it’s a gold rush grow, as juniors try to which is mining for gold become seniors. in Mexico’s Guerrero Gold Belt. “It’s The Glencore-Xstrata proposal would a gold rush, and in every commodity, be the biggest mining deal in history if not just gold,” he says. completed and would create a company “As developing nations build their with a market value of $90 billion infrastructure and require metals for (£56 billion). Glencore, the world’s manufacturing, you’ve had incredible largest publicly-traded commodities demand around the globe. So the trader, plans to swallow up Xstrata’s companies are all producing more, coal and copper mines to produce a and they’ve got to replace the ounces mega-company which the two firms – copper, iron ore, gold. They need to say would have sales of $209 billion replenish and replace those reserves. (£130 billion) this year.

So they’ve got to gobble up companies “The global uncertainty and volatility that have a new potential mine.” is likely to continue through 2012, but Total global deal value in the mining mining and metals companies have an sector grew by a startling 43 per cent appetite for growth and are increasingly last year, increasing from $113.7 billion unwilling to stall their growth plans, (£70.6 billion) in 2010 to $162.4 billion so it’s likely there will be a return to (£101 billion) in 2011, according to a deal-making in 2012,” Ernst & Young’s

Total global deal value in the mining sector grew by a startling 43 per cent last year global mining and metals transaction leader Lee Downham says in the annual mining report, Recognizing Value in Volatility.

“Those who can work with volatility will be the deal makers in 2012 and there may well be real buying opportunities,” he predicts.

The mining industry is naturally attracted to mergers and acquisitions, since companies must constantly look

for new sources of gold, copper, iron ore and other resources to remain profitable, analysts say.

Acquiring companies down the food chain – as Glencore plans to do with a willing Xstrata – satisfies the never-ending need to find and excavate metals and minerals, says Bruno del Ama, co-founder and CEO of Global X Funds, a New York-based provider of exchange-traded funds that facilitates access to investment opportunities across the global markets. “It’s cheaper to buy a competitor than to set up a whole new mine,” del Ama adds.

Having weathered the storm of the global economic downturn, mining industry companies found themselves with healthy balance sheets by the second half of last year. Commodities prices went up from 2010 to 2011, the Ernst & Young report notes, providing a source of funding for majors in the field.

“Many companies are faced with the challenging but favourable decision of how best to utilise their capital,”

Acquisition activity: industry bullish about closing deals Likelihood of closing deals

15%

Quality of deal opportunities

15%

No of deal opportunities

17%

51%

55%

45%

0 Negative

34%

30%

37% 50%

Stable

100% Positive

Source: Ernst & Young Global Capital Confidence Barometer: metals and mining

Downham concludes. “The dilemma of buy, build or return is back on many boardroom tables.”

In south-east Asia in particular, the demand for non-precious metals such as iron ore and cooper is non-negotiable, Newstrike Capital’s Whittall says: “If you’re growing at nine per cent of GDP, you need steel, and you have to get it from somewhere.”

Demand for gold is also burgeoning, supported by high demand for gold by consumers in India and China, as well as by investors seeking a store of value; this makes even junior miners, which are usually regarded as risky investments because of the likelihood of making a strike, into attractive targets. And there are many smaller gold mining companies that could be up for grabs.

Some manufacturers are eager to assure the supply of certain, sometimes rare, metals for their products, according to Paul Martyn, global VP of supply strategy at BravoSolution, which makes junior mines with assured resources into very appealing acquisitions. The electronics industry has been eyeing Africa, he says.

“A lot of our hand-held telephones, iPads and laptops require some very rare metals. So there’s a scramble among electronics manufacturers to acquire the mining companies,’’ Martyn adds.

“They’re trying to guarantee the limited supply so they can rob the early supply.’’

Mining funds will benefit greatly from this trend, as their holdings are expected to appreciate in value with bids expected. But, at the time of writing, everyone is watching to see the outcome of the Glencore-Xstrata merger. Should it fail, the mergers and acquisitions boost could also falter, at least for the near future.

Space invaders Forward-thinking entrepreneurs are looking beyond the stars for their next seam of potential profit Want to make money and advance technology through mining? Never mind those metal and mineral reserves on Earth. Shoot the Moon, says a cadre of space-age thinking entrepreneurs.

The latest to announce its mission is Planetary Resources. With backing from Google founder Larry Page and chairman Eric Schmidt, the firm is “poised to initiate prospecting missions targeting resource-rich asteroids that are easily accessible”.

Planetary Resources is joining a lengthening list of would-be moon miners. “Mining the Moon for fuel to get to Mars would be a great business and one we intend to pursue,” says David Gump,

“The first trillionaires will make their fortunes in space” – Richards

president of the US-based Astrobotic Technology The company holds a National Aeronautics and Space Administration (NASA) contract to develop an excavation machine to go after the volatile frozen methane at the lunar pole.

Not only are the resources on the Moon rich, Gump says, but they can be mined without environmental or community disruption. It makes the Moon the most “ethical” location for mining.

NASA is privatising space flight, offering many functions of space exploration to private industry that it would once have handled through its own scientists. This move is creating opportunities for Astrobotic and many others with out-of-this-world ambitions. And 26 teams around the world are competing for the Google Lunar X Prize, a $30m (£18.6m) pool for the first privately-funded teams that can land a robot on the Moon and send back video and data to Earth.

Entrepreneurs are eyeing precious metals such

Out of this world: companies are planning to mine in space as titanium and platinum, as well as helium-3, a rare isotope that promises to be a critical source of fuel. And private entities say they can do the job for a lot less than government.

“It is quite obvious that Moon exploration will be a significant endeavour by 2020-plus and this will be largely robotic,” says Julian Ranger, a UK investor in Astrobotic since 2008.

And for those with stratospheric ambition, the Moon is irresistible.

“My entire life has been dedicated to building the institutions and the organisations that will help humanity become a multi-planet species,” says Robert Richards, CEO of Moon Express, a lunar transportation and data services company.

“The first trillionaires will make their fortunes in space.”

– Susan Milligan

Business Reporter · May 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Like us: facebook.com/business-reporter

Mining

Find us online: business-reporter.co.uk

9

Can they cut it?

Business Reporter gets mining chiefs across the globe to ’fess up to the challenges ahead

By Bill Hinchberger and Andrew Rosenbaum The commodities boom offers the chance of rapid growth – and eventually improved share prices – to mining companies, but only if they manage it properly.

It’s an issue that occupies the minds of the leaders of some of the world’s most important mining companies, and they don’t all think the same way about the challenges they face.

When asked about his firm’s biggest challenge, the CEO of the world’s second-largest mining company said it is managing growth, notably of investments worth billions of dollars in five new major projects. “Our challenge is to implement all of these projects,” said Murilo Ferreira of Brazil’s Vale.

“The second challenge is recruiting people.

When I joined the firm in 1998, just after privatisation, we employed a little over 12,000 people. Today we have more than 132,000 contractors and employees.”

Organic growth Vale is ramping up investments, Ferreira says, to cope with expected increases in demand and no new acquisitions are to be expected. “Growth will be organic,” he adds.

Although Vale’s share price has fallen by about 16 per cent in the past year, Ferreira believes that the company’s continuing operating success will eventually change this.

Vale reported all-time records in net profit and operating revenues for 2011, as global metals demand remained strong for much of the year and shipments of iron ore and pellets peaked at almost 300m metric tons. Its nickel and copper sales had their best year since 2008, after the company’s metals output grew following the end of a year-long strike at its Canadian nickel mines

Mining CEOs on file

and operations started at new production capacity.

“We broke several records, despite a challenging economic scenario,” says Ferreira, adding good management as the key.

Managing rapid organic growth is indeed the challenge. The London Stock Exchange-listed Avocet Mining saw gold production more than double last year at its west African mines, and CEO Brett Richards says the company is on track to double total production again by 2015.

But he admits that rapid growth has been tempered by a sharp increase in cash costs. “We have a substantial pipeline of projects in west

“Mining companies are counting on price rises, particularly to cover exploration for increased volume” – Waplan Africa, in Burkina Faso and Guinea,” Richards says.

“We plan to grow these using our cash on hand and the cash generated from operations during the next few years as we ramp up production.”

At iron-ore miner Northland Resources, which is still in the development stage, costs are also a concern. “During last two or three years, capital and operating expenses have risen sharply,” says CEO Karl-Axel Waplan. “This means that mining companies are counting on price rises, particularly to cover exploration for increased volume.”

In Australia, labour costs for miners have almost doubled, Waplan says, while productivity has not changed. “Then, there are concerns about increased tax loads on our companies in many countries.” Clearly, miners are counting on commodities prices staying high to support development – and investors are skittish about betting on strategy, as Northland’s share price in Toronto is down more than 40 per cent for the year as we write.

At London-listed BHP Billiton, the world’s

largest miner, a different strategy is being pursued.

CEO Marius Kloppers says company’s strategy is based on diversification. “We are interested in commodities with different growth profiles, whose prices kick in at different stages of the economic cycle,” Kloppers told The Financial Times.

Dealing out of diamonds Unlike other large miners, BHP Billiton is following a policy of acquisition and divestment, to concentrate on the sectors with the best return.

Thus it is selling off assets in diamond mining, while acquiring ones in natural gas, and is seeking to increase its assets in potash mining, too.

The firm’s share price is down by about 15 per cent from the previous year at the time of writing, which suggests the market is responding to fears that BHP remains a hostage to the fortune of the global economy in general.

One miner that seems unafraid to face down heavy costs is AIM-listed Scotgold Resources, which received permission to go ahead with its Cononish gold mine in the national park near Tyndrum in Scotland in February. Scotgold is being asked to pay large sums in securit y

for environmental damage and eventual park restoration. And, as CEO Chris Sangster admits, the cost of mining in a developed country is higher than it would be in an emerging market.

“But the cost of mining in Scotland is no higher than it would be in Scandinavia, or anywhere else in Europe,” he adds. “And we are confident that the price of gold and silver will hold firm.”

The Cononish mine is expected to produce 154,000 ounces of gold and 589,000 ounces of silver over the next 10 years, so perhaps Sangster is right to be confident. The firm’s share price rose on the announcement that the project is going forward.

Investors are simply too skittish about miners.

Vale

Avocet Mining

Northland Resources

BHP Billiton

Scotsgold Resources

Murilo Ferreira

Brett Richards

Karl-Axel Waplan

Marius Kloppers

Chris Sangster

Turnover 2011: $60.38m (£37.3m) Vale is the second biggest mining company in the world and the largest in the Americas. It produces a wide range of metals and minerals and is also active in the logistics, energy and steel sectors.

Based in Rio De Janeiro, Brazil, Vale has activities in 38 countries.

Turnover 2011: $213.4m (£131.8m) Gold mining and exploration company Avocet joined the LSE in December 2011 and the FTSE 250 in March 2012.

In 2010, the company sold off extensive mining operations in South East Asia.

Most of Avocets’ operations are now in West Africa.

Turnover: N/A (still in development) Northland Resources is an international mining company, in development as a major European iron ore producer.

The company controls two projects in an established iron ore province located on both sides of the border between Sweden and Finland.

Turnover 2011: $71.7m (£44.3m) BHP Billiton is the world’s largest diversified natural resources company.

It is among the largest producers of major commodities, titanium minerals, and uranium along with interests in oil and gas. The company has over 100,000 employees worldwide.

Turnover: N/A (still in development) Scotgold Resources is targeting gold and silver mineralisation in Scotland.

The Australian public company acquired Scotgold Scotland and Fynegold in 2007. Scotgold was admitted to the Australian Stock Exchange and listed on AIM in February 2010.

Share price trends 2008 - 2010

2008

2009

Source: Google Finance

2010

2008

2009

2010

2008

2009

2010

2008

2009

2010

2008

2009

2010

Business Reporter · May 2012

10

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

Find us online: business-reporter.co.uk

Reward without the risk With less money around for investment, mining companies have to look to new ways of working to expand their business Gold mining has been a part of life in the Tapajos region of northern Brazil for many decades, but modern-day miners must move with the times to stay in business.

Before the credit crunch, investors were happy to fund exploration projects with generous prospects of jam tomorrow, but now they want to eat their jam today.

“We are seeing a strong movement in investor appetite away from blue-sky exploration stories into more production-based activities calculated to generate cashflow,” says Clive Line, finance director of AIM and TSX-listed mining and

exploration company Serabi Gold.

“Suddenly cashflow is king, and investment funding for small exploration companies will be harder to come by over the next 12 months. The businesses that survive will be those that can make themselves self-sufficient.”

For the past three years Serabi has been exploring 53,000 hectares in the Jardim de Ouro region of Tapajos. The company has good prospects of delivering on its objective of establishing resources of 1.5m ounces of gold capable of sustaining future production rates of 70,000-75,000 ounces a year, but more cash is

needed to fund the next phase of exploration.

Given the post-recession cash squeeze, what Serabi really needs is the equivalent of a gold mine in its back garden – which is exactly what it has.

From late 2003 until the end of 2008 the Palito mine, which is Serabi’s primary asset, was in operation producing more than 110,000 ounces of gold, but when further working capital was needed it became a victim of the global financial crisis and the mine was temporarily suspended.

Serabi’s current management always intended to reopen Palito when the time was right – and it believes that time is now.

“We have commissioned an independent Preliminary Economic Assessment on re-opening Palito and are hopeful it will demonstrate that with better mining practices and with current gold prices (almost double their 2008 levels), Palito producing a modest 2w0,000 ounces per year can provide more than good cash flow to help fund the company’s future exploration activity” The Palito mine and the related infrastructure has been well looked after during its few dormant years and the processing plant was operating until 2010, so the cost of restarting production should be relatively low, says L ine.

“Selective” mining techniques, which involve minimising the mining of waste in order that high-grade ore is delivered for processing, will

Follow us on twitter: @bizness reporter ensure that unit costs are minimised.

Serabi’s exploration projects in Jardim de Ouro have deliberately been located close to Palito to enable ore from potential satellite mines to be processed at the existing plant, creating significant economies of scale. Two promising discoveries have been made at Currutela and Piaui during 2011, each about three kilometres from Palito. In time they could add further production of at least another 40,000 ounces a year. Initial indications also suggest that the gold-bearing mineralisation extends from Palito to Currutela, which would significantly increase Serabi’s current gold resource inventory.

Investors’ growing appetite for cashflow also reflects a dwindling appetite for risk, so Serabi is deliberately minimising its operational risks.

The Palito mine has already demonstrated that high recovery rates (more than 90 per cent) are achievable, and the company is considering bringing in Peruvian or Bolivian contractors with extensive experience of this type of mining operation.

Local infrastructure is good and is being further improved. The company already has all the necessary licences and permits, and because the existing and proposed mines will be primarily underground, their environmental footprint and impact will be relatively small.

“Last year delivered good exploration success that fits our long-term strategy of growth and we now hope to back this up with a costeffective reopening of the Palito mine to generate cash flow,” says Line.

Business Reporter · May 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Like us: facebook.com/business-reporter

Business moo-ving into green pastures Engaging communities and respecting the environment can make the difference between success and failure for companies

By Bill Hinchberger and Andrew Rosenbaum Mining companies have to keep a lot of people. As well as shareholders, other stakeholders are setting standards they expect businesses to reach – whether it’s taking care of the environment or considering the communities in which they operate.

CEOs are scampering to find ways to handle these competing pressures. “This is not altruism and not warmed-over corporate social responsibility,” says

in their approach to value.

Sirius Minerals, which recently started mining on a potash project in North Yorkshire, has tried hard to integrate the project into the community. CEO Chris Fraser says: “What we are doing is innovative and will add a great deal to the skills base for the UK’s mining industry.

“We are working hard to establish an industry that could well be here for the next 150 years, and the depth of the skills base will be important not just to Yorkshire’s economy, but the

UK miners are facing upto environmenal responsibilities Britt Banks, a recently retired executive of the Newmont Mining Corporation, based in the US, and vice-chair of the World Economic Forum’s Global Agenda Council on the Future of Mining and Metals.

In that latter role, he helped create the Responsible Mineral D evelopment I n it iat ive, which develops guidelines for companies that want to improve their relationships with governments, communities, and non-governmental firms.

“If they want access to land and capital, they need to improve on these issues,” Banks says.

By taking extra steps to be good corporate citizens, executives hope to buy insurance against nationalisations, excessive regulation, higher taxes and protests that could hamstring operations.

At a speech last October in Melbourne, BHP Billiton CEO Marius Kloppers said mining companies should aim for more than profits. “Companies need to include measures such as their level of community acceptance

Mining

Find us online: business-reporter.co.uk

national economy as well.”

Fraser expects the project to create 1,000 jobs directly, and an additional 4,000 indirectly. And the company insists it is working to reduce its environmental impact and has been in regular contact with the North York Moors National Park Authority to ensure impact will be minimal and damage will be repaired.

Even Chinese mining firms, which are traditionally very slow to consider social responsibility, are beginning to join the parade.

“They are hiring local people, including at the senior level,” says Kobus van der Wath, founder and group manager of China-based consultancy the Beijing Axis. “And the Chinese government tells expats that they have to respect local ways of doing things.”

Some that haven’t adjusted have found themselves unable to negotiate deals to expand their operations in Africa, van der Wath adds.

Which goes to show that keeping everyone on your side is good business.

11

Enter the dragon China’s a major player in mining, but is it creating opportunities for or exploiting countries with natural resources?

By Bill Hinchberger Given China’s demand for natural resources, it’s no surprise that it has invested heavily in mining operations abroad.

“The country is driving the commodity super-cycle, so it would be strange if Chinese companies, with a two-to-three decade demand curve, did not look at investing themselves,” says Martyn Davies, CEO of Johannesburg-based consultancy Frontier Advisory.

But the move has led to charges of exploitation and colonialism, even sparking a backlash in parts of Africa. China forges ahead nonetheless, with deals announced every few months, and many observers reject the charges, saying that the country is only “doing business”.

Going out plan China started in the 1990s, when a number of Chinese state-owned enterprises began investing abroad: Shougang Corporation acquired an iron ore mine in Peru in 1993; Sinosteel Corporation took up chrome mining in South Africa; and China Nonferrous Metals went into copper in Zambia.

But the real change came with China’s “Going Out” foreign investment strategy in the 2000s. A study of more than 100 Chinese overseas mining investments by University of Cambridge geographer Ruben Gonzalez-Vicente showed concentrations in Australia, Canada, some countries in South America and a dozen countries in sub-Saharan Africa. Some cash goes into joint ventures, such as China Minmetal’s deal with Codelco in Chile, or share purchases, most famously when Chinalco took a stake in global giant Rio Tinto.

The mining sector has been largely responsible for the jump in exports by many poor countries, especially in Africa, where it accounted for three-quarters of new exports between 1995 and 2008, according to the Africa Competitiveness Report 2011, published by the World Bank, the African Development Bank, and the World Economic Forum (WEF). “China has provided an environment for African growth, with resource demand and high commodity prices,” says Frontier Advisory’s Davies.

About a quarter of China’s foreign-direct investment focuses on extractive sectors, sparking charges of a “resource grab” – especially in the west. Press accounts have focused on what a report from the 2011 World Economic Forum on Africa in Cape Town characterised as

an “investment-for-resources [relationship between China and Africa] that has been criticised as mercantilist and imbalanced”.

African backlash The anti-Chinese stance by the successful opposition candidate in last year’s presidential elections in Zambia is often pointed to as evidence of an African backlash against China. Zambian president Michael Sata seems to have changed his position since his inauguration, and many observers discount stories of serious problems. “I

China’s state capitalism approach does not follow the development assistance aid model of Europe and North America think with a few exceptions the so-called homegrown backlash is significantly exaggerated,” Davies adds.

China needs raw materials, of course, but the focus on them also stems from the fact that, in many nations of sub-Saharan Africa, that’s pretty much all they have to offer.

“I say it is about doing business,” says Deborah Brautigam, professor of international service at American University in Washington and the author of The Dragon’s Gift, a book about Chinese investment in Africa. “Africa’s major sectors are open now, but they are not going to be exporting computer chips. Resources are available.

That is where they have a competitive advantage.”

China is not the only emerging countr y that is pushing abroad more aggressively in the mining sector.

Brazil and India have been investing in countries that range from Mozambique to Liberia.

On the bandwagon Tr ad it ion a l i nve s tor s, including the US, Australia and countries in Europe, are also giving Africa a second look. “China’s engagement has prompted more interest in Africa, says Kobus van der Wath, founder and

group manager of the Beijing Axis, a China-based consultancy.

China’s state capitalism approach does not follow the development assistance aid model of Europe and North America. It often o p e r at e s t h r o u g h t h e China Development Bank Corporation, responsible for more than 80 per cent of the estimated $75 billion (£46.6 billion) that China has loaned to Latin America since 2005, according to US think-tank Inter-American Dialogue.

“With the Chinese it does not look the same,” adds Brautigam. “They have a lot of instruments they can use to do business. Most of it is not foreign aid according to the definition we use.”

Martyn Davies says: “The only uniquely Chinese characteristic is the pervasiveness of the Chinese policy banks.” However, Brautigam notes that Chinese standards for labour and the environment are not the same as those in the west, a factor that can create friction.

Nearly everyone expects China to continue to invest in global mining, and it is up to resource-rich countries to develop the capacity to take advantage of them.

Business Reporter · May 2012

12

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

Find us online: business-reporter.co.uk

Follow us on twitter: @bizness reporter

Mozambique and a tale of two pathfinders A British mining company is battling to recover its licences Mozambique is blessed with a rich seam of natural resources and is deservedly attracting the attention of the foreign investment community. But, the experience of one British company there is sending shockwaves through the industry as it attempts to recover licences from a retired government minister who transferred them to a local company with a similar name.

Pathfinder Minerals, listed on the London Stock Exchange, purchased IM Minerals in 2011 for £35m. A UK company, IM Minerals, through its Mozambique subsidiary, held two licences over land in northern Mozambique containing valuable quantities of ilmenite, rutile and zircon. Among the sellers of IM Minerals was Mozambican former government minister General Veloso.

Through the sale the General became a large shareholder and director of Pathfinder, owning more than 10 per cent of the public company alongside investment funds such as JP Morgan Asset Management.

With £11m invested in 2011, Pathfinder began a fast-track development of what has been descr ibed as one of t he best undeveloped mineral sands projects in the world.

A scoping study undertaken by URS Scott Wilson placed a net present value on Pathfinder’s licences of $529m (£327m). Jacobs Matasis, the South African subsidiary of Jacobs Engineering, was appointed to carry out a definitive feasibility study and secured a $700,000 (£432,947) grant from the South African government towards work on Pathfinder’s project, while engineering consultants drew up plans for a wet-dredging operation supplying over 1m tonnes a year of the products for export.

Pathfinder was well received in Hong Kong as it began to market the products to future buyers in October 2011. Little did they know that, a month earlier, their co-director Veloso had established a company in Mozambique with the similar name, Pathfinder Moçambique. In November 2011 Veloso resigned from the board asserting that the company no longer held its licences. Trading in Pathfinder’s shares was suspended as Pathfinder set about establishing the status of its licences; and instructed litigators.

“On a trip to Maputo in late November 2011 the Ministry of Mineral Resources informed us that it had processed an application from Veloso to combine the licences and

transfer them to a company named Pathfinder Moçambique,” says Nick Trew, Pathfinder Minerals’ CEO. “We immediately informed the minister that this had no affiliation with the real Pathfinder. In fact we established that it was controlled by Veloso.” Pathfinder Minerals was assured that the ministry would investigate the transfer but no explanation has yet been given. “The ministry issued our subsidiary’s licence certificates. If the rule of law is to be upheld it will surely have to restore the licences to their legal holder,” adds Trew.

But, in a further blow to Pathfinder, Veloso and his affiliates now deny that Pathfinder Minerals’ company, IM Minerals, ever owned its Mozambique subsidiary, despite signing the share certificate that established that ownership; and despite taking a 20% ownership of Pathfinder in exchange for their shares in IM Minerals.

On 19 December 2011 the English courts granted Pathfinder Minerals an interim injunction, subsequently replaced by undertakings by Veloso and affiliates not to interfere further with IM Minerals’ asserted rights of ownership in the Mozambique subsidiary pending Pathfinder Minerals’ claim, under agreements

Pathfinder plans to explore the coast of Mozambique

by which those rights were acquired, being determined by the English courts later this year.

The fate of Pathfinder Minerals and the valuable sands on Mozambique’s coast now rests in the hands of British and Mozambican courts and politicians.

“We are urging the Mozambique government to intervene,” says Trew. “If Mozambique is truly to capitalise on its vast natural resources the international mining community must believe that the rule of law, particularly a respect for rights of ownership, will prevail.”

Time to invest? Think zinc One mining company is digging into Poland’s historical roots and resources of zinc to maintain production and supply for the in-demand mineral Zinc is a vital ingredient in the automotive, white goods and construction industries, where it’s used to prevent corrosion. But by the middle of this decade it will be in short supply.

Demand has risen dramatically in developing economies, particularly China. The country used to import or export zinc depending on the price, but is expected to be a net importer for the foreseeable future, accounting for almost half of global consumption and pushing up prices worldwide.

Simultaneously, several of the world’s major zinc mines will close over the next few years, reducing production by around 1.5m tonnes – more than 12 per cent of the current total.

International mining conglomerates are already snapping up zinc mines in anticipation of what insiders call the “scramble for concentrate”.

Europe consumes 30 per cent of the world’s zinc while producing just 4 per cent. But it wasn’t always so. In Upper Silesia, southern Poland, zinc has been mined since the 12th century and on an industrial scale since the 1940s. One of Upper Silesia’s principal zinc mines, Pomorzany, will cease production within a few years, but plenty more zinc remains in the ground in nearby deposits.

Exploration and development company Rathdowney Resources has a 150 sq km concession, called Olza, almost next door to Pomorzany. Poland’s state survey estimated

“The historical records show very large deposits; if confirmed these have the potential to support mines with a lifespan of 30 to 40 years” – Barry

Olza’s workable zinc reserves at more than 100,000 tonnes, and Rathdowney’s research and development team are on track to confirm this – to Canadian compliance standards – by the middle of this year.

“Olza is the next in a ‘string of pearls’ across Upper Silesia,” says John Barry, Rathdowney’s CEO and president. “The historical records show very large deposits; if confirmed these have the potential to support mines with a lifespan of 30 to 40 years.”

The Olza concession deposits could have “zinc equivalent” contents (zinc mixed with lead) of 6 to 7 per cent – almost as much as Pomorzany.

The impending closure of Pomorzany is beneficial to Rathdowney, as the existing processing plant will become idle in 2016 or 2017.

By then the plant should have been transferred

from state to commercial ownership. Pomorzany even has the luxury of its own smelter.

“It will be easy to transport material from Olza to Pomorzany for processing,” says Barry.

“A processing plant accounts for most of the start-up costs of a zinc mine, so this will mean we could get up and running for a fraction of the cost – something like €100m rather than €500m.”

Unemployment in Upper Silesia is around 20 per cent, so losing Pomorzany and the related jobs would be a disaster for the regional economy.

“We’re already building relationships with the local communities, because without them you don’t have a mine,” says Barry.

Rathdowney is a small company but with a lot of muscle behind it. An 18 per cent stake is owned by the principals of Canadian firm Hunter Dickinson, the largest mineral resources development group in North America.

“Hunter Dickinson can do the lot, from geology to capital markets, and we can tap into all that,” says Barry. “It means we have the flexibility of a junior combined with the muscle of a major.”

Rathdowney was floated on the Toronto Stock Exchange in March 2011. Currently its shares look cheap: a market cap of around $36m Canadian, despite having more than $20m in the bank. But once its first compliant resource study is published this summer, that could quickly change.

“Rathdowney offers a rare opportunity to invest in a zinc exploration company with

Geologists in Poland

strong backers and known deposits that have the potential to be brought into production in the medium term,” says Barry. jbarry@rathdowneyresources.com Call: 353 1 6624351

Business Reporter · May 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Like us: facebook.com/business-reporter

Mining

Find us online: business-reporter.co.uk

13

Waiting for a pay out Are the prospects good for investment in mining funds? The experts think it could be time to cash in on the gains miners are making

By Andrew Rosenbaum Mining stocks are performing poorly, despite all the cash the miners are earning. But the directors of mining funds maintain that the big breakout is around the corner.

How to pick the right mining fund? Should you choose a fund that has diverse holdings, stocks of large miners and junior miners, from all the various sectors? Or should you pick a fund that is focused on a single metal, a gold or a silver fund?

Do you simply choose one that has performed well in the past, although past performance may be no guide to future returns? Or do you try a new fund, one that seems well adapted to current conditions?

“With mining stocks stuck at low levels, choosing a mining fund isn’t easy,” says Peter Toogood, investment services director at researcher Morningstar. “One should bear in mind that mining stocks have been paying relatively low dividends, even though they are taking in large amounts of cash.

“Yes, many mining companies will use that cash to buy other miners, and that may

“Stabilising economic conditions in Europe and the US should stimulate investment appetite” – Bowie boost mining shares to some extent, but that won’t necessarily help the mining funds.”

John Lambert, part of the mining team at PricewaterhouseCoopers in London says: “The cash flow from all but the largest mining firms has been volatile, just as the price of commodities continues to be volatile in the short term.”

It’s a challenging environment for funds, some of which are performing relatively well, but none of which are performing as well as the actual metals themselves.

Firm fundamentals For Clive Burstow, who manages Barings Global Mining fund, a recoupling is soon to be underway.

“Metals markets have navigated a stormy first half, supported by strong long-term fundamentals that are now obscured by uncertainty over Europe’s debt crisis and Chinese economic slowdown,” he says. “But fundamentals are going to reassert themselves, and investors are going to perceive this.”

The supply outlook for many commodities such as copper is tight, but this may not show up fully in the price until later in the year, Burstow adds. “We expect metals prices to rise across the spectrum – copper, iron ore, gold and coal will all go up. This will continue to sustain cash flow at mining companies, and since there are limited ways for miners to use the cash to accelerate projects, an M&A wave should be expected.”

Burstow says that management at mining companies has improved overall, so they should manage these changes, and control costs.

The Barings Global Mining Fund launched in March, and will place about two-thirds of its funds in small and mid-cap companies chosen, Burstow says, for interesting geology and good management. Burstow is bullish on copper and

gold, and the fund will have 10-15 per cent direct exposure to commodities through ETFs. Like Burstow, Ed Bowie of Altus Strategies is planning on commodities prices staying high. Altus Strategies concentrates on the gold space, but also looks at other junior commodities producers. One fund is 65 per cent gold weighted, and the other is strictly gold.

“Gold has had a long run, but demand from Chinese and Indian consumers is increasing,” Bow ie says.

“That along with central-bank demand, should continue to push gold higher, and stabilising economic conditions in Europe and the US should stimulate investment appetite” Neil Gregson, who runs the JPM Global Mining Fund, believes in what he calls “finding the producers of tomorrow”. Gregson intends to continue his predecessor Ian Henderson’s strategy: taking stakes in miners that can achieve significant growth of reserves and production.

Taking advantage He also wants to identify opportunities in undervalued mining assets, and to take advantage of the commodities boom for rising prices. “China will continue to host a rapidly growing economy,” he says, “and China accounts for 40 per cent of the world’s commodities.”

Supplying this demand is what Gregson

considers one of the most important factors. “Take copper: T hey haven’t fou nd enough high-quality mines in recent years; iron ore is still undeveloped because better infrastructure is needed, same is true for steaming coal.” Finding good producers at good prices offers the surest chance for higher returns, he says.

Gregson looks for good management, but he points out that it can’t make up for poor assets.

“In judging a company, it’s 60 per cent assets and 40 per cent management. Without the right geology, no amount of management skill can make a mining company profitable.”

But talent and judgement together are needed to make a mining fund profitable. Whatever kind of fund you choose, the manager must have plenty of both.

Rare opportunities Global demand for rare earths is set to continue rising, yet prices are volatile. So are the companies producing them a good investment?

We want to have more toys. More mobile phones, more video games, more souped-up cars. We also want to have more clean energy.

Rare earths are needed for all these and more applications, which should keep pushing the prices of these metals higher.

Yet, as with gold, copper, iron ore, and other mining commodities, the prices for them and the stock prices for the companies that produce them, have been strangely volatile.

“The market for rare earths is small and not very transparently traded,” says John Sykes, principal at the mining-andmetals specialist Greenfield Research in London. “It can react sharply to any change coming out of China.”

China controls about 90 per cent of all rare earths production. When the Chinese decided to cut rare earths

exports drastically in 2011, it sent prices for the elements spiralling.

Since then it has relaxed export controls somewhat, but there is never enough supply to make manufacturers rest easy. This explains why, on January 30, 12 major German manufacturers, including Daimler and Bosch, announced an alliance intended to

Rare earths are used in the Prius

ensure their supply of rare earths.

In the US, meanwhile, because rare earths are used extensively in high-tech weapons, the Pentagon is working to aid American rare earths producers.

World demand for rare earth elements is estimated at 136,000 tons per year, but global demand is projected to rise to at least 185,000 tons as early as 2015, according to industry expert Marc Humphries of the US Congressional Research Service. Supply is currently about equal to demand, but there is little chance of supply keeping up with demand in the next five to ten years.

However, there are some new sources of supply and processing coming online. “When looking at rare earths producers, it’s important to understand their ability to mine the commodities, and ability to process them,” says Sykes.

The California-based Molycorp Minerals, which has seen its share price decline by half since April 2011, has put $1 billion (£0.62 billion) of capital into its mine at Mountain Pass, California.

On February 21, it announced the start of production. The company says that it remains on track to achieve its full phase 1 annual production rate of 19,050

China controls about 90 per cent of all rare earths production tonnes of rare earth oxide by the end of the third quarter of 2012.

Dahlman Rose analyst Anthony Young maintains his ‘buy’ rating on the stock. “While rare earth prices continue their descent over the near term, we remain optimistic on the longterm outlook for the industry,” he says.

The other current producer of rare

earths outside China is Australia-based Lynas Corp. Lynas mines rare earths at its Mount Weld project in Western Australia, one of the richest known deposit of rare earths in the world, and has just begun processing them at the Lynas Advanced Materials Plant near Kuantan in Pahang, Malaysia.

The company faces opposition in Malaysia from environmentalists who allege that the plant will cause local damage. But Lynas’ plant is wellpositioned to service the Japanese electronics industry, which is one of the largest consumers of rare earths in the world. Hitachi, Japan’s thirdbiggest company, uses as much as 600 tons of rare earth metals each year.

Toyota Motor Corp is also likely to become a client of Lynas, as it uses rare earths, for example, in the motor of its Prius hybrid, but it has also built its own plant to recycle the metals from used electronics.

– Andrew Rosenbaum

Business Reporter · May 2012

14

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

Find us online: business-reporter.co.uk

Follow us on twitter: @bizness reporter

Golden strategies delivering results Impressive projects in Turkey and Africa are putting one company ahead of its competitors Stratex International is set to underpin its exciting exploration portfolio with gold production from two mines.

This AIM-quoted exploration and development company is active in Turkey, East Africa and West Africa and in the seven years since it was formed, has discovered more than 2.2m ounces of gold and 7.9m ounces silver.

It has also generated a substantial portfolio of exploration and development projects – with its portfolio most advanced in Turkey, where two projects offer near-term exposure to gold production, currently scheduled for 2013.

These are the Inlice project, through a partnership with Turkish civil engineering company NTF Insaat Ticaret, and the Altintepe

In Ethiopia and Djibouti, exploration has identified an extensive new gold district project (subject to the outcome of scoping and feasibility studies), through a partnership with Bahar Madencilik, a Turkish contract gold mining company.

Elsewhere in Turkey, exploration is at an advanced stage at four key projects – Oksut, Altunhisar and Hasancelebi (all gold) and Muratdere (copper-gold-silver-molybdenum-rhenium). These

developments involve partnerships with major international companies – Centerra Exploration in Oksut and Altunhisar, Teck Madencilik Sanayi Ticaret in Hasancelebi, and a successful Turkish financial institution and investment company in Muratdere.

The Oksut project is a significant discovery, with a declared resource of 1.05m ounces of gold, which should be amenable to open-pit mining and heap-leach recovery. The resource is open to the east and north, and additional nearby targets have already been identified within the same volcanic centre.

Partner Centerra, having completed the first stage of the joint-venture agreement and vested at 50 per cent, has now embarked on the second stage of exploration and evaluation whereby it can earn an additional 20 per cent through a further investment of $3m (£1.8m). An aggressive secondstage drill programme is planned for this year.

Stratex also has a strategic alliance agreement with leading international copper company Antofagasta to explore for porphyry copper and other copper-deposit types in Turkey.

In Ethiopia and Djibouti, grassroots exploration has identified an extensive new gold district in the low-lying ground of the Afar Depression.

At Blackrock, a 95 per cent-owned prospect in the northern Afar region of Ethiopia, more than 30km of outcropping epithermal veins have been identified to date, with surface grades of up to 60.4 g/t. Full results from the recently completed

The Blackrock project, in Northern Ethopia, is proving to be a fruitful area for gold discoveries

first-phase drilling programme are due to be announced shortly.

Stratex’s success in the region has attracted the attention of Thani Ashanti, an AngloGold Ashanti joint-venture company which is currently funding exploration of 10 licence areas in Ethiopia and Djibouti – the Afar Project.

This includes the partnership’s recent discovery of the Pandora epithermal vein system in Djibouti, where a gold-bearing vein of up to 2.5 metres in width is hosted within a fault structure that extends for at least 5km. Sampling to date has returned grades up to 25.9 g/t Au over the main section of the outcropping vein, which extends for at least 500 metres.

Approximately 6.5km north-west of the main structure, vein float (superficial material) with

Small but potentially mighty Understanding the industry, networking and brand awareness can all help small and medium-sized businesses achieve success in mining The mining sector is increasingly dominated by giant multinationals, and entering it can seem a mountainous challenge to small and medium-sized (SME) suppliers. But it is possible, and can be very worthwhile.

“Mining is a booming market and there’s lots of opportunity for niche products and services,” says Andy Blythe, managing director of UK engineering firm B&W Mechanical

Handling. “SMEs shouldn’t be afraid of getting into mining, and the mining giants shouldn’t be afraid of doing business with SMEs. Mining involves a lot of bespoke and highly serviceoriented work, which is the kind of thing SMEs can be very good at.”

Blythe should know. B&W employs about 40 people – owned by German family business, the Aumund Group – specialises in highly bespoke bulk

handling equipment for a number of industries, and has recently enjoyed a string of successes in the mining sector.

Know the customer “We went to one of the major mining OEM distributors and said, ‘We think one of our products can enable your customers to make big savings’,” says Blythe. “Knowing the industry, where our products fit and the service they

a maximum gold content of 80.1 g/t Au has been discovered, highlighting the potential scale of this new system. Following an initial investment of £3m in Stratex during 2011, AngloGold Ashanti is now a substantial shareholder (11.52 per cent), as well as joint-venture partner.

With additional early-stage interests in northern Ethiopia and West Africa, Stratex has a substantial and well-balanced portfolio offering exposure to near- and longer-term exploration projects, heavyweight partners to take the projects through to production, and the funding to continue adding value through its highly successful exploration strategies. www.stratexinternational.com +44 (0)207 830 9650

provide to the customer is our USP.” B&W had calculated that its Samson reception feeders could reduce load and feed times, cutting the time a mining company’s trucks were sitting idle waiting to be filled.

“We calculated we could save firms up to 50 cents per tonne,” says Blythe.

“When you’re processing hundreds of thousands of tonnes a second, that’s a lot of money.”

“You need to be able to demonstrate that you understand the client’s cost and value drivers and that you talk their language,” says Blythe. “Where can you help them to save money or fulfil their contracts faster?”

A lot of detailed data may have to be mastered. Local labour rates can vary enormously between, for example, Africa and Australia.

It’s also important to understand fuel costs and seemingly inconsequential numbers such as the price of rubber.

“If we can take two trucks out of the client’s fleet, that can represent a huge saving in diesel and tyres,” says Blythe.

B&W’s advice to SMEs is to approach mining companies directly where possible and not rely on dealing solely with contractors or agents.

“You need to make contacts at three levels within the company,” says Blythe. “First you need to create brand awareness with senior executives, so that when your name appears on a proposal they don’t say, ‘Who are they?’

So you need to be seen at big expos, in

industry forums and at various mineral and mining institutions. The second level is middle management, the senior technicians and project managers who influence purchasing decisions.

Network to succeed “You’ve got to network with these people, continually meet them and promote your technology,” says Blythe.

“This is also where understanding their cost and value drivers is so important.”

Finally, there are the people at the sharp end who operate the equipment.

“There’s quite a lot of ‘hard hat and jeans’ stuff on the ground with these guys, identifying practical problems and suggesting solutions,” says Blythe.

Several organisations offer assistance to UK companies keen to establish themselves in the minerals sector, including the Association of British Mining Companies, the Construction Equipment Association and UK Trade & Investment.

There’s one other factor in favour of mining and minerals companies, says Blythe: their positive attitude.

“People in the minerals industry are very willing to co-operate. If you start a relationship they will stick with you and help you to work through the inevitable on-site challenges.

“There’s a lot of camaraderie across the supply chain,” says Blythe. mining@bwmech.co.uk www.bwmech.co.uk

Business Reporter · May 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Like us: facebook.com/business-reporter

Industry view

Find us online: business-reporter.co.uk

15

Confident of a silver lining The future looks bright for one mining firm, with exploration on its latest project set to yield more than 200m ounces of silver, lead and zinc Arian Silver Corporation (AIM, TSX and Frankfurt-listed) is a silver exploration, development and production company in Mexico’s Zacatecas state, one of the richest known silverbearing districts in the world. The company began trial mining at its San José project in October 2010, with the first batch of silverbearing concentrate shipped to the smelter in December 2010. The San José project, covering some 6,300 ha and 100 per cent-owned by Arian, is located about 55km from Zacatecas city. A past-producing silver, lead and zinc mine, the San José project is now producing from two mining blocks. The Zacatecas region has historically produced more than 1 billion ounces of silver since discoveries first began by Spanish c olo n i a l i s t s i n t h e 15th century.

With a combination of acc u rate pr ice f or e c a s t i n g, due to the overvalued US dollar and the acknowledgement of many new uses for silver (for example, nanotechnology), silver hit a 20-year high of nearly $50 in early 2011. In

Arian’s key project, San José, hosts more than 117m ounces of silver as well as significant amounts of lead and zinc

Jim Williams, left, is confident that Arian’s latest silver exploration project will be fruitful

light of macro-economic factors, such as the unforeseen eurozone crisis, the metal retreated to around $30 per ounce – still a significant premium to the $8 per ounce price in 2005, when the company was privately established.

Today, Arian’s key project, San José, hosts more than 117m ounces of silver as well as significant amounts of lead and zinc, delineated by nearly 40km of drilling and additional surface and underground systematic exploration over the past five to

six years. The company uses mechanised mining, which means lower unit costs.

Arian has now completed its first 12 months production of silver and is gearing up for larger scale commercial production. The company has significant untested mineralisation within the 6,300 ha. In addition to the San José project, Arian has a host of other properties all within Zacatecas State and all equally important in their own right. The outlook for the company and silver prices remains encouraging.

Jim Williams is CEO of Arian www.ariansilver.com +44 (0)20 7887 6599

ATLANTIC COAL – A Successful London Listed Coal Company Focussed on Anthracite Production and Regional Project Consolidation in the Pennsylvanian Anthracite Fields in the United States.

Atlantic Coal plc is a coal production company focussed on open cast mining and processing of high-grade, low emission anthracite coal. It is currently producing from the 100% owned Stockton Colliery opencast operation in the Pennsylvania Coal Field, USA. The recent relocation of a rail line has opened up new seams at the mine, strip ratios are improving and upgrades to machinery are targeted to increase the current production profile significantly.

Expansion is at the forefront of Atlantic Coal’s strategy and the management, which includes highly experienced UK mining professionals, has identified an opportunity to build a substantial coal company in this prospective, politically stable region, which has a 150 year history of mining and is serviced by excellent infrastructure. The regional market dynamics are buoyant, with demand for anthracite outstripping supply, primarily due to the broad range of industrial and domestic uses for

the product. Additionally with access to Atlantic ports, the international markets are also accessible.

In line with its expansion strategy, a number of properties have been identified which will transform the Company’s production profile. This includes the Pott & Bannon anthracite coal mining property in Schuykill County, which the Board believes offers the potential to more than double Atlantic’s existing anthracite reserves.

The Board believes that Atlantic Coal is at a tipping point and that it is ideally positioned to capitalise on its expertise, location, and market positioning to become a mid-tier coal producer and deliver significant value to its shareholders.

If you are interested in additional investment opportunities available, please contact Managing Director Steve Best on 020 3328 5670.

TELMAYBR12