Why equity firm Appian wants to invest US$2bn in Latin American mining

Amid booming demand for minerals for the global energy transition, London-based private equity firm Appian Capital plans to invest up to US$2bn in the Latin American mining industry.

BNamericas talks to Michael W. Scherb, CEO of Appian Capital Advisory and chairman of the firm's investment committee, to find out more about the strategic approach of one of world's largest private equity investors in metals and mining, the threats and opportunities related to investing in mining in the region, the most interesting minerals for investment, the trends that move investors around the world and why Latin America could become a commodity superpower.

BNamericas: What explains Appian’s interest in critical minerals for the energy transition, and what are the attractions that you see in the Latin American mining industry?

Scherb: Latin America is the most important of any investment destination for us. In fact, more than 70% of our capital has gone into Latin America already and we plan to invest a similar amount in the future. 

The reason is that there are many positive trends and if you look beyond the short term of the politics, I think the medium-term trends in Latin America are really appealing, where you have a mining culture and a lot of high-grade critical minerals deposits, and it is effectively in very close proximity to the US and European markets, so you have a lot of things trending in the right direction. We're just seeing better opportunity there on a risk-reward basis relative to some other regions.  

We believe there are many ways that investors can invest in critical minerals such as metals and mining that offer the best exposure and inflation protection. Mining is the first piece of the entire critical minerals supply chain and is protected from price increases because miners can pass those price increases down the supply chain. 

On a geopolitical basis, critical mineral supply security is going to be increasingly important for investors around the world. If you have access to deposits with critical minerals, you're sitting in a very strong position for the energy transition. The whole world is electrifying. Whereas the previous cycle was driven by China's middle-class consumption patterns, this current cycle is driven by the entire world – all countries rich and poor – moving towards an electric future, and we think the world needs a much more stable supply of commodities to supply that.

BNamericas: What do you think about the fact that countries like Chile or Bolivia consider lithium a strategic resource that should be controlled mainly by the State? Does that facilitate the arrival of new investments in the region?

Scherb: I don't think it does. I would love to hear from politicians who can provide me with one example throughout history where government ownership has increased investment or has made those operations more efficient. Investor capital is fluid, meaning it will go to whatever country offers the best reward and most constructive environment, and the best support structure. It's important to establish an environment whereby governments work closely with private enterprise, but don't directly compete with private enterprise. 

The government's job is to set the groundwork and the framework for attracting foreign investment without competing with foreign investment. We believe foreign investors are very good allocators in private capital because they'll go to the highest reward opportunities whereas governments will struggle with that allocation. Do they have the necessary skill sets in government to move quickly and quantify the risks of every mining project, allocate capital and then guide that project responsibly to production? 

BNamericas: How much investment do you intend to inject into the Latin American mining industry and do you have investment plans in particular for Chile in lithium, copper or any other minerals?

Scherb: We owned a royalty on a large copper mine in Chile previously and we would love to go back into Chile. We're not overly worried about some of the short-term volatility you're seeing around politics, even in Peru, Mexico and Chile. We're taking a positive medium- and long-term view and that's assuming that things don't go too far off track politically. We'd love to invest more in Chile across the board in the critical mineral space. In terms of overall quantity, we'd love to invest around US$2bn-plus in these regions over the next few years. 

BNamericas: What are the main risks when it comes to making investments in Latin America? 

Scherb: Every country has risk, even developed markets. It's about quantifying that level of risk, but our role as investors is to try and put a risk factor on a particular investment and then compare that with the rewards we might get in terms of return and then you begin to see if one country presents excessive risk versus the rewards. So, the risk in Latin America is different to the risk you see in developed markets. 

The risk in Latin America is community, so working closely with communities and addressing the ESG risk is key. Those are dynamic risks that we have to work through quantifying in a due diligence process. In Chile there is also the risk in access to water, another risk which should be quantified by the investor.

BNamericas: Why did Appian suspend negotiations with ACG related to the sale of two mining operations in Brazil in a deal worth US$1bn?  

Scherb: We actually terminated that proposal because there was a different view on valuation. We have a specific view of value of our projects, and if buyers attempt to deviate from that, we will terminate the discussions. This is the benefit of having long-term patient capital backing you, which some groups with shorter term capital and outlooks may struggle to understand. We are currently under exclusivity with one party after receiving a number of approaches on the assets before. 

BNamericas: Do you have any other project or acquisition plan that involves Brazilian mines? 

Scherb: Brazil is our biggest pipeline in Latin America. We most recently made an investment in a Brazilian graphite producer called Graphcoa and the graphite material is going to feed a facility in the US that provides spherical graphite for electric vehicle batteries. Graphite is key for the EV supply chain but China controls about 99% of the world's graphite. We are investing a few hundred million in this vertical integration, linking our mining operations to the downstream player to produce battery ingredients.

BNamericas: What do you think of the political tension generated by China's dominance of the supply chain of critical minerals for electromobility?

Scherb: China is taking a very long-term view, and it's two decades ahead of nearly everyone else when it comes to supply chain consolidation and downstream manufacturing. The government support we’re seeing in Europe or America is a response to China's perspectives. It's really up to the US and Europe to compete with the Chinese long-term view. 

The Latin American countries should be using this as an opportunity, given the fact that nearshoring is pulling a lot of investment to countries located closer to the US. So, I see it as an opportunity for Latin America to position itself appropriately.

BNamericas: Do you think that the conflict in the Middle East could harm new investments in mining?  

Scherb: I think it could speed up the transition because people don't want to take the risk of the oil and gas prices, nor the Middle East volatility. We're going to see a stronger push to try and make the world go electric faster. 

BNamericas: When talking about the new environmental trends for the energy transition, what do you think are the most important ESG practices that mining should be considering from now on? 

Scherb: I think early community engagement is important and oftentimes companies leave the community engagement too late when they seek approval. They have to ensure all stakeholders feel that they have a part to play in the operation and a genuine voice. The environmental assessment needs to be done from a tier-1 basis using the standards like the IFC-World Bank. All of Appian’s portfolio companies are expected to operate in a tier-1 manner. 

BNamericas: Which metal or mineral is most interesting for investment right now? 

Scherb: I think anything that's linked to critical minerals in the energy transition is safe to back through investment, but anything linked to China’s GDP growth is a really challenged investment, like iron ore. Gold is interesting, interest rates are probably topping out now and it is expected that maybe over the medium-term, interest rates need to come down.

Gold is still holding up very well, so gold and precious metals could be interesting on a medium-term basis, but critical minerals are where you know you should be investing a lot of capital. We also like anything linked to fertilizers and changing consumption patterns due to food shortages – potash or phosphate for example. 

There are also a number of commodities, such as zinc, which have been overlooked due to the rush of capital into critical minerals, and this is presenting attractive entry points for us. 

BNamericas: What will be the investor trends for next year?

Scherb: We see four main trends: raising funds as a hedge against inflation, because when investors see inflation rising, they look for opportunities to hedge against inflation. In that sense, mining is the best one because it's the first piece of the critical minerals economy and the energy transition. 

There is also the impact of geopolitics on portfolios, and the role of the energy transition. ESG-focused mining is another major one. Mining is now considered part of the solution to a problem. Many ESG investors who previously avoided mining, now know that it's a way to gain exposure, which is why mining is a positive force for change. This is a new trend that we believe will continue to develop.