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LISTEN: We need the speculative money

There is an equity ‘gap’ in the market – Paul Miller, Nedbank.

WARREN THOMPSON: Joining me on the podcast now is Paul Miller, Nedbank mining executive, good to have you with us, Paul.

PAUL MILLER: Good to be here and good to be in Cape Town.

WARREN THOMPSON: What number Indaba is this for you?

PAUL MILLER: I think it must be at least nine or ten.

WARREN THOMPSON: Okay, so you’ve seen a few seasons in this place. This year, looking a little bit better than it was last year?

PAUL MILLER: I don’t know if the Indaba is better, I think it’s essential for people in the mining game to be in Cape Town this week. There is a competitor conference going on up the hill, the 1-2-1 Investment Conference, it’s put a bit of competitive tension into the game, so the Mining Indaba organisers have had to lift their [game], really trying to get mining companies and investors back into the Convention Centre, which is good to see. I think they have had some success, investors no longer have to pay a delegate’s fee, which I think is quite important, so that’s good. But let’s be clear, the Mining Indaba is about African mining, not about South African mining, and it’s really popular amongst the mining fraternity from Perth in Australia, from London and they are here largely about new projects elsewhere in the continent, not so much about South Africa and its problems.  

WARREN THOMPSON: We’re sitting here in the corner office and off the record you talked about the investment Nedbank makes to be here and bringing your teams of bankers and analysts down here, so from that perspective it’s still good to do business at the Indaba?

PAUL MILLER: We have a big team here and we make sure that everyone uses their time usefully. So we had over 100 meetings scheduled before we arrived, so I think it is useful from a relationship building point of view. You do come away with opportunities, there is no question, so it’s very efficient from that perspective.

WARREN THOMPSON: Your team had a bumper year last year, just tell us about some of the activities you undertook in a market that was still very tough in 2016.

PAUL MILLER: We closed 24 mining financings last year, in a normal year we would expect to close about half that. So that was a surprisingly good year, we weren’t anticipating it would be that good and I think if we look back with the benefit of hindsight it was probably largely as a consequence of the prices improving and then the big company treasurers looking to lock in the benefit in longer tenure loans. So we’ve seen them put in place longer tenure facilities really…

WARREN THOMPSON: As the commodity prices rallied.

PAUL MILLER: Yes but at the same time they have been paying down their debt, so we’ve seen companies with strong cash flows in thermal coal, iron ore and gold pay down their debt. So the South African mining industry is not particularly over-geared at all, which means from our perspective that they have been paying back their loans and just holding their facilities.

WARREN THOMPSON: So I guess the inverse of that is that they would be pretty well-positioned to expand when they decide to?

PAUL MILLER: No, I think it’s more of a holding pattern at this stage, so they will be reducing gearing on their balance sheets, reducing risk, positioning themselves to take advantage of an upswing and anticipate a return to paying dividends. So I don’t think we are going to see anyone starting to pay over the odds for M&A activity, for example. The obvious exception perhaps is the very brave move of Sibanye to take a run at Stillwater.

WARREN THOMPSON: A R30 billion transaction that they are going to have to finance, as I understand, some bridging finance and then obviously long-term gear that asset to pay for it, is that right?

PAUL MILLER: Yes and Sibanye is a client of ours and we have been asked to participate, as have all banks.

WARREN THOMPSON: Just a little bit on the policy or the investment environment, what’s stopping investors from coming to South Africa in ever greater numbers and investing capital in the mining industry?

PAUL MILLER: My view is that a big part of it is the perception of South Africa being a nearly impossible environment in which to do business. The legacy of the labour relations issues we have faced in recent years, like the PGM strike, the platinum industry strike, and then also the idea that you can’t necessarily do straight forward business with our regulator and that probably is as a result of their degree of discretion that the officials have and the vagueness of our regulations. So if you combine vague regulations with activist officials applying their discretion it becomes very difficult for a foreigner to choose between this environment and another one. I think there’s a lack of appreciation in South Africa that we are one of many mining jurisdictions around the world, others are competing for capital, whereas we tend to do a lot more navel-gazing around our own parochial problems in South Africa.

WARREN THOMPSON: But, Paul, while the commodity prices, with the exception of one or two commodities, have greatly improved through 2016, which has improved the mood, you still see what you call an equity gap in terms of what’s happening from the equity financing side of the mining business, just explain that for us.

PAUL MILLER: This relates to new developments, new projects across the continent. Fundamentally the bank, ourselves, we come in to fill the last piece of the puzzle for a funding plan, the last piece is senior debt. Before that we need speculative equity investment to discover the deposit, to drill the deposit, to do the studies, to prove it’s economic before the promoters come to us. So the promoters have got to be able to raise that high-risk venture capital effectively and to do that traditionally it’s been done on the two great equity markets for junior mining, being Toronto in Canada, Australia and to some extent the UK. Of course, with this slump in commodity prices and the decline in a lot of equity values we saw those types of investors withdraw for a number of years. So the pipeline of new projects coming up for financing has a gap in it and that’s what I call the equity gap. We are concerned about that obviously because we need people to have spent speculative money before our less speculative money can go into projects and that’s going to be the challenge. That, of course, is why mining is a cyclical industry because the investment leaves the industry, leaves a gap, which leads to shortages of commodities, which leads to higher prices, which re-attracts the speculative money, which then goes out and discovers the deposits, which floods the market with excess supply. Through millennia we’ve been repeating the same mistakes.

WARREN THOMPSON: So it essentially amplifies the cyclicality of the industry.

PAUL MILLER: Yes, the capital providers enter the industry when prices are rising and they leave the industry when prices are falling, causing the prices to fall and then when it comes time for a recovery they flood back in, compounding the cycle.

WARREN THOMPSON: The last question is just around where you are going to see activity, potentially the types of deals that you look to finance in the next few years, are they commodity-specific. We had big iron ore projects in West Africa that got canned over the last few years, do you expect any of those coming back on stream? How do you see things playing out, especially with a US president who looks like he’s going to spend heavily to invest in physical infrastructure in the United States?

PAUL MILLER: I’m glad you have a view on what the president of the United States is going to do, I have no idea.

WARREN THOMPSON: [Laughing]

PAUL MILLER: But the two favourites are gold and copper, gold as a safe haven investment, copper as a play on this infrastructural investment. I think those are probably the favourites. There’s this trend or story narrative around battery materials…

WARREN THOMPSON: Right, so lithium, graphite…

PAUL MILLER: Indeed and we are concerned about that, quite frankly, because there seems to be a lot of speculative money flowing into that and we just don’t see how all those projects that people are promoting are going to get built. So that’s a concern. It’s all about having the best quality deposit, knowing that of the 16 Australian graphite companies active in East Africa maybe three will build a project. We don’t know which three, of course, yet. So we’ll have to see how that plays out, so that’s an interesting theme. We don’t have any commodities that we wouldn’t do or any countries we wouldn’t go into but it seems that the countries of most interest are Ivory Coast is very hot at the moment, Senegal to a lesser extent, Mali has got some gold projects coming along, Tanzania is picking up, there’s a lot of interest in graphite in Tanzania but also in gold. So yes, there is lots of activity elsewhere on the continent and we are certainly pursuing those opportunities and we’d like to do a lot more business elsewhere on the continent. Don’t forget though that more than half of the African mining industry is still in South Africa and those companies aren’t going to go away any time soon.

WARREN THOMPSON: That was Paul Miller, Nedbank mining executive.

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