Michael W. Scherb, Founder & CEO,

APPIAN CAPITAL ADVISORY LLP

"Today, ESG comes up in nearly every interaction with investors. It used to be a buzzword, then it became a checklist, and now it has become a real thematic in underwriting."

What was your vision when you founded Appian Capital Advisory 10 years ago?

We saw a unique opportunity because of a mismatch in the sector. Short term capital was chasing what is a very long lead time, capital-intensive business. In other words, speculative retail, hedge funds and institutional investors were marking the market every month or every quarter, which does not allow management teams to see through cycles. The result was management making the same mistakes every cycle – buying and building at the wrong times. Our conclusion was that you could avoid a lot of the cyclicality by having a long term capital base, so we put together a 10-year fund, which could extend to 15 years if necessary. This allows management teams to access the capital and support they need to build assets at the most suitable time, rather than on a short term horizon.

In January 2021, the completion of the Appian Natural Resources Fund II was announced for US$775 million. How was the fund raised and where will it be deployed?

The first Appian Natural Resources Fund raised US$375 million, making eight investments, and the seventh of which will be in production by the middle of 2021. From an operational perspective it has worked really well, and proved our thesis. Fund II is a scaling up of this proven business model, and we raised US$775 million, plus a large amount of co-invest from 15 groups of investors. This has positioned Appian as one of the biggest private equity players in the mining sector.

Fund II has the same strategy as Fund I, but on a slightly larger scale, as we can offer more credit and royalties. We have guiding macro themes that have been in place for over five years now, such as electrification, for example. However, there is no real chase for commodities as we are technically focused, targeting bottom-up fundamentals of an asset. We managed to deploy 45% of Fund II during Covid, which proves you are still able to get good deals done despite what commodity prices are doing.

Which jurisdictions is Appian looking at, and what factors do you take into account when weighing up country risk?

I speak with the ministers of mines of many countries, and we are clear with the point that our capital will go to the path of least resistance and best risk-reward. Latin America is the most important region for Appian, and 70% of our capital is invested there. Throughout Latin America, some countries have done a great job of understanding how to attract long-term, professional, value-add capital. Other countries not so much. We would like to increase Appian’s position in Peru, where our head of Latam and COO (Igor Gonzales, former CEO of Sierra Metals) are based, and Mexico.

When it comes to management vs asset quality, does Appian prefer to bet on the jockey or bet on the horse?

For Appian it is asset quality first and foremost. You can always change management if you have to, but you cannot change the asset. The mining sector has quite a shallow talent pool and needs to do a better job of attracting talent to the space. Furthermore, there needs to be more investment in training for things such as corporate governance. There are good geologists and engineers that become CEOs by default, but will not necessarily know how to run a company. This is where Appian can help, by putting in place the right governance framework and reporting functions, as well as building a culture of accountability, which we do for our portfolio companies.

How has the importance of ESG in the mining space evolved from an investment standpoint?

Today, ESG comes up in nearly every interaction with investors. It used to be a buzzword, then it became a checklist, and now it has become a real thematic in underwriting. It is an educational process, walking institutional investors (like pension plans and sovereign wealth funds) through the good that mining does in the world. This is not just about decarbonization and commodities, which is everyone’s focus, but involves communities, jobs, health, and infrastructure investment in remote parts of countries which may not usually receive benefits. A lot of sectors can learn from mining’s ability to bring different stakeholders together as part of a final product.