Denham Capital seeks upside advantage during downturn

TORONTO (miningweekly.com) – With most metals reaching a bottom, and many of the ‘zombie juniors’ finally laid to rest, opportunities for private-equity companies to find value and upside potential in the mining space have continued to grow.

Seeking to tap into these opportunities, private equity firm Denham Capital was making  advances in Australia and Canada, aware that a preference remained for projects that were already advanced some way across the development chain, or for operations that required greater expertise to unlock latent value. Exploration projects or properties still in their early stages had less appeal and were considered riskier propositions.

Australia had been identified as increasingly competitive during 2014, when contractor, construction and service costs fell on the downturn. Concurrently, the pool of experienced labour grew on layoffs, reversing the difficulty of finding talent, as had happened during the resource supercycle.

Further advantages were gained on the Australian dollar devaluing against the US dollar, creating a useful discount on investment.

Denham Capital had backed two Australia-focused teams: Auctus Minerals and Pembroke Resources.

Pembroke sought to acquire and develop metallurgical coal assets in Australia or South East Asia. “It’s currently in the process of negotiating an interesting deal and things are moving along quite nicely,” Denham Capital director Caroline Donally told Mining Weekly Online.

However, she was unable to elaborate further. “We’re hopeful something will be resolved in the next six weeks to two months.”

Auctus acquired Atherton Resources late last year at A$0.20 a share following a number of earlier bids in 2015. One of Atherton’s flagships was the King Vol deposit, located near Cairns, North Queensland, which had a JORC-compliant resource of 2.99-million tonnes at 11.9% zinc, 0.8% copper, 0.6% lead and 29.9 g/t silver.

In an August 2015 presentation, Atherton estimated that the project’s output could reach 35 900 t/y zinc, 840 t/y copper, 910 t/y lead and 185 000 oz silver in concentrate.

“We took Atherton private and our team is finishing off a bankable feasibility study with a view to bringing the project into production. The Auctus team will look for further opportunities once they have bedded down what they’re currently doing,” said Donally.

NORTHERN LIGHT
The competitive trends witnessed in Australia were mirrored in Canada, where the Canadian dollar also fell markedly against the US dollar. 

However, many Canadian management teams were unfamiliar with Denham’s investment model and how it could assist and further their interests. Donally noted that many were wedded to raising money publicly and found private-equity tie-ups to be comparatively unfamiliar territory.

“The model came out of oil and gas and is not terribly well known in the mining sector, which meant explaining what we do, how we go about things and why that’s good for management teams and Denham,” said Donally.

It was also about finding the right fit for Denham. Donally noted that many projects examined were found to be top-heavy with geologists and lacked the necessary engineers or managers with operational experience.

“We eventually came across JDS Silver. It had already acquired the Silvertip project when we became involved with them. We’ve put in all of the construction capital for that project,” said Donally.

The silver/zinc/lead project was located in northern British Columbia, around 16 km south of the Yukon, and had a history stretching back to the mid-1950s. Work-to-date included $40-million in exploration work, with 2.4 km of underground workings and 71 000 m of surface and underground drilling.

“By the time we got involved it was fully permitted and had all the necessary agreements in place. Construction started in December and we’re due to enter production by end-September 2016. We also see lots of further exploration upside here,” added Donally.

Meanwhile, a processing facility was bought from one of Teck’s operations that had been placed on care and maintenance, which helped shorten the projected construction time. JDS also signed a life-of-mine social economic participation agreement with the local Kaska First Nation.

The JDS team had a pipeline of further opportunities to be mulled, while Denham wanted to explore prospects on the central-eastern side of Canada. However, Donally stressed that it took time to find the right team.

“We’re still out there looking and we’ve yet to find a second team [for Canada]. But it’s certainly something on our radar,” she said. “We see a lot of opportunity in the country and there’s potential to deploy capital there and to make returns for management teams, Denham and our investors.”

WORKING MODEL
Denham’s model was comparatively straightforward; it selected and backed chosen teams to deliver value within a certain jurisdiction under Denham’s auspices. The effort dovetailed with previously identified trends or macro themes.

“Our approach is to find the right teams and make sure they understand what we’re trying to achieve. We’re not the type of firm where you can ring us up and say: ‘Hey I’ve got the shares and a term sheet, and I need to close by next Friday’,” said Donally.

The teams were given fiscal backing to acquire an earn-in that delivered a controlling stake or outright ownership for Denham. A project would then be developed through to production or, if already operational, made viable.

Denham sought a controlling stake to determine strategy and make a smooth exit once value had been created and its goals had been achieved.

It also sought assets that sat lower on the cost curve and which could make money despite the current economic headwinds. More of these assets had become available as viable juniors slowly and successfully took their projects towards advanced stages.

“What we’re seeing in these markets is the ability to access later-stage projects. That means you’re not spending five years helping to take a project through exploration, preliminary economic assessment, prefeasibility studies and the like.

“We see the vast majority of value attributed to getting an asset into production and then showing you can make money,” concluded Donally.