The struggles of private equity to fund mineral exploration

The positive cycle of metals prices in the last three years has not necessarily been an incentive for private investment funds and private equity to increase their funding for mining exploration.

Many private investment funds have instead chosen to focus on very advanced projects or developments already in the production phase.

Such is the case of Santiago Metals, a mining company controlled by the global investment fund manager Denham Capital, which in 2013 had the mandate to invest US$150mn in early stage projects. The company was involved in the discovery, exploration and later sale of the assets. However, that changed in 2015.

"At the beginning of 2015, and in line with a drop in the price of copper, the investors put pressure on the fund and asked their investment vehicles to manage their assets in order to see faster return of capital," said Antonio Egaña, the technical manager at Santiago Metals, at an exploration mining event in Santiago.

"They forced us to finish exploration works and seek a new objective: to be a fast vehicle for the development of operations. From that moment onwards, we've been focused on production and generating cash flow," said Egaña.

Santiago Metals has three different assets in Chile: Delirio, Puquios and Tuina.

Delirio is in the construction phase and is set to see its first cathode produced in the first half of 2019. It has resources of 20Mt at 0.45% copper and will produce 9,000t/y.

Minería Activa is another company that manages Chilean private investment funds.

In the super cycle of copper and gold, the company actively invested in greenfield projects, but when commodity prices started to decline, it began focusing on more advanced projects, with more resources and a higher status, senior company geologist Eduardo Esparza told BNamericas.

"With the recent cycle, we're still maintaining our relationship with an investment fund - Fondo de inversion Minero - which seeks advanced projects. The other projects, which used to be greenfield, are on hold waiting for new partners to proceed with exploration," said Esparza.

Esparza feels that this year private investment is recovering, but not as expected with more investors buying assets. "I believe that this year we're not going to be successful in securing a partner for these projects. Perhaps it will be next year."

Minería Activa was one of the companies that participated in state development agency Corfo's Fenix fund program, launched by the government back in 2011 to provide risk capital financing for mining exploration. The fund had more than US$150mn available for financing projects by local junior companies, but after review by Corfo the fund fell into disuse.

Mineria Activa's most advanced project is Filipinas, which has 10Mt of resources at 1% copper, according to Esparza. It has a 2008 scoping study and a resource estimate.

"We believe this project has more resources. With 9,000ha, we've only explored 10% of the land. The idea is to find a partner to continue on exploring and find more resources," he added. 

Next Minerals is another company that creates value through the exploration and development of assets in Chile. The financing comes from family offices and private investors in Chile and abroad.  

Its most advanced project is Don Eduardo, an open pit iron ore operation with capacity to produce 3,960,000t/y.

Nicolás Fuster, former VP of development at Next Minerals said at last year's CRU copper conference, that in Chile, mid-size mining has been overshadowed by large operations. According to the executive, in the country local investors don't understand the investment risk in this segment of the industry. 

"Currently around 30 mid-sized companies are struggling to finance their exploration, and even their expansion, because they depend on local investors," Fuster was quoted as saying by local news site Minería Chilena.

Many investors share the opinion that there is a high concentration of property in the hands of major companies.

A huge area of criticism has been Chilean's current concession system, which has allowed a few large companies and particularly majors to accumulate large swathes of land, as they hoard land in areas with potential mineral capacity, preventing juniors from staking a land claim to explore.

But not everything is negative. According to a study by state copper commission Cochilco, exploration investment reached US$603mn in 2017, up 36% compared with the year before.

Junior companies not only increased not only their contribution to the total to 8.8% in 2017, but they also increased their budgets for exploration by 52.7%.