Considering current metals prices, how difficult is it to find value in the right type of projects?
I think you have to look at value relatively. The five biggest mining companies are trading at around a 4x EV/EBITDA valuation, compared to Tesla which is trading at an 80x EV/EBITDA metric, and they are all basically feeding the same end market. This represents a massive disconnect to where the retail and public institutional investor is putting their capital, and I think there is an opportunity to close that gap.
There is also a disconnect between the capital required and the capital on offer, and that’s where we step in. Bear in mind, Appian does not invest in public entities: we invest in private assets. This does not only mean investing in the traded shares of a company – it could be a JV earn-in at the asset level with a corporate that is struggling to find financing.
How do you view the current political risk in Latin America from a mining standpoint?
We view politics very much like we view commodity prices – a pendulum on a clock swinging back and forth, side to side, but rarely in equilibrium down the center. Investors will always deploy their capital where they see the best risk/reward proposition. If politics moves against foreign investment in the mining sector, we will simply invest our capital in a different country. We are watching closely what is happening in Chile and Peru, but the benefit of having a 10-to-12-year-fund is we do not have to overreact, and can step in when we think the market offers an opportunity. We do not necessarily think that a move to the left would stop us from investing. There was a similar reaction when AMLO was elected in Mexico, and that has turned out better than expected.
Everyone seems to be bullish about copper at the moment. Does this concern you?
We always try to be counter cyclical to the market. When the whole market is saying one thing it is usually an indication to do the opposite.
It is slightly worrying that everyone is so bullish, but this is potentially a unique case because we don’t see where the supply is coming from, we don’t see the ability to easily ramp up brownfield deposits, and we don’t see a lot of exploration success. At the same time, we do see demand getting stronger. Even if Chinese construction was to slow down, our view is that the energy transition would more than make up for this. Substitution should also not be a big issue, given copper’s unique properties to conduct electricity. If a way to economically process low-grade ores was found, that is one of the only areas I see that could dramatically affect copper.
What could be done to start changing the public image surrounding mining?
Mining is an easy industry to blame because there is an emotive attachment to what is in the ground, given that it involves a country’s natural heritage and resources. However, as we all know, mining is in everything around us, so metals need to be extracted in a socially-responsible way. This is something we champion at Appian by being a signatory to the UN-backed Principles for Responsible Investment and viewing ESG as a crucial element in all our investment decisions.
As well as mining companies being more transparent, governments could adopt a more constructive tone with the industry. Politicians should also be more realistic about developing new opportunities. It is easy to put out a statement that everyone will drive an EV by 2040, but when you do the math there is no way the world has enough copper or nickel to support that. There is also a lot of ‘greenflation’, where you have negative mining sentiment on one hand, and push for energy transition on the other. This will only lead to higher prices and more inflation. Governments therefore have a responsibility to allow mines to get into production unabated.
What are some of the common errors you see management teams make in the mining sector?
Management teams across the board, from geostats definition to resource estimation, through to capital cost estimation, mine plan design, plant design and downstream tailings are almost always more optimistic about their assets than is warranted. Being realistic is key instead of trying to sell something you do not have or cannot do.