Minvest Partners finds niche in advanced exploration assets

Valuations in the mining sector have sunk low enough to attract value-oriented private equity funds, including big generalist firms Apollo Global Management, Carlyle Group and KKR & Co.

But most of this money — as evidenced by Carlyle and KKR’s interest in Rio Tinto’s Northparkes copper mine this year — is geared towards producing or near-producing assets, leaving many juniors with earlier-stage projects stranded in the current market slump.

Sensing an opportunity in this overlooked group of assets, the Toronto-based merchant bank Minerx Group started its own private equity arm called Minvest Partners about a year ago.

“We recognized a while ago that the industry was grinding to a halt,” says Stephen Stewart, president of Minerx and managing partner of Minvest. “We knew that there would be all sorts of opportunities available in larger junior companies, mid-tier producers or even some of the juniors that have more advanced-stage assets that could be acquired at low costs, but wouldn’t be attractive to the typical private equity.”

Stewart says that while most private equity deals focus on larger cash-flowing or near cash-flowing assets, the projects Minvest is looking for are earlier stage.

“All the assets we’re looking at make no claims to production in the next twelve months, which is sort of what everybody else is looking for.”

Minerx and Minvest’s principals are financiers, geologists, engineers and lawyers who used to do traditional mining exploration and development deals — until the public capital markets began drying up.

Minvest Partners (no relation to Minvest Capital) turned to private equity because it needed patient investors.

“I don’t know when the market is going to turn, but I know it’s not short-term,” says Stewart, who has 15 years of experience as a financier in the mining industry, working alongside his father and Minerx founder and chairman Alexander Stewart. “The public markets, the traditional financing partners of the mining and metals space — whether it’s retail or institutions . . . they’ve been beaten down so hard that they don’t want to participate.”

Traditional investors also have a shorter time horizon that is more focused on the current share price, Stewart notes.

“If they make 30%, they’re going to sell,” he says, explaining that the short-term view doesn’t necessarily align with the time it will take for the industry to recover.

That leaves a space for private equity, and for gold-focused Minvest — which has a time horizon of up to five years — the opportunity to buy advanced exploration projects in friendly deals at bargain prices.

The company is guided by the question: “What are the miners going to be looking for in three to five years?” Stewart says.

“Everything is all geared towards making the asset nice and shiny, so that when the mining companies shift their attentions back away from deleveraging and cost-cutting and towards replenishing depleted reserves, we want to be the group that has a nice portfolio of low-hanging fruit — assets that will be first looked at.”

Once Minvest makes an acquisition, its technical team is responsible for proving up the economics in anticipation of the mining sector’s recovery.

“We want to intelligently develop the assets without taking on too much exploration risk. Because quite honestly, you can buy ounces in the ground for cheaper than it costs to explore for them,” Stewart says.

That means not pouring money into exploration to add ounces, but focusing on the economics and advancing existing resources through the preliminary economic assessment, prefeasibility and feasibility study stages.

“Optimizing and enhancing the assets economics is, we believe, the best way to create value right now,” he adds. “We’re not looking to blow our brains out with huge drill budgets — that’s destroying capital instead of creating it . . . [because] nobody’s attributing value to those ounces.”

In addition to focusing on mineable gold projects, Minvest is only interested in “the best jurisdictions” — namely Canada, the U.S. and parts of South America.

Minvest so far has one investor, and is looking for others who also see opportunity in the downturn.

While it hasn’t closed any acquisitions yet, Minvest has been evaluating assets for some time, and continuing extensive due diligence on several projects owned by publicly listed companies.

Because it has been going about its business quietly, cash-starved juniors and mid-tiers with properties to sell aren’t lining up around the block — yet.

“I suspect as we do deploy capital, as we start to close a deal or two, we’ll probably get a lot more attention, as issuers are highly motivated to raise capital any way they can.” Stewart says.

In the meantime, Minvest is sorting the good projects from the bad to make the most of the current buyer’s market, which is attracting all sorts of sophisticated investors to the mining industry.

“Private equity and many smart people see the opportunity and recognize that it’s going to take some time, but if you can be patient, you have the right team, the right strategy, and the ability to identify and evaluate the good assets and separate them from the bad assets, of which there are many. If you can do that and buy right and hold onto it for a little bit, there’s a real opportunity — a once-in-a-generation type of opportunity.”

— This article originally appeared on The Northern Miner’s sister website www.miningmarkets.ca.