Active fund management’s edge in mining
Chris Mahoney, investment manager, discusses the key role active managers have in the mining sector by providing equity financing for select listed exploration companies.
However, securing equity funding through primary offerings has been particularly tough for listed exploration and development companies in the mining sector. These companies are focused on finding and developing new mineral deposits. Typically they don’t generate any revenue, as they don’t have any mines in production. To fund their activities they usually rely on several rounds of equity issuance in the years after listing on an exchange (so-called primary deals). Recently, many have come to learn that this market isn’t there for them.
Critical resources
ETFs don’t participate
Perhaps the main reason it has become so much harder for listed exploration companies in the mining sector to secure equity financing is the rise of the Exchange-Traded Funds (ETFs). Like all listed equity sectors in recent years, the popularity of passive investing has seen a migration of money from the actively managed funds that invest in the mining space to ETFs that track an index of mining companies. More than half of the AUM in gold mining sector is now held in ETFs. Whilst the ETFs have their merits, they only buy shares in the so-called secondary market, and only on the back of index weightings changing or to deploy inflows. When their investee companies raise equity capital by selling new shares through primary deals, the ETFs do not participate.
Essentially, the biggest investors in the mining sector (the ETFs) do not follow their money, not adding to their existing holdings when those companies raise money by selling new shares, regardless of how attractive the new shares are. Several CEOs of exploration and development focused mining companies have told me of their frustration with lack of support from their ETF shareholders when it comes to raising additional equity capital.
Bargaining power
Not only has it been frequently possible to buy the new shares at a >10% discount to the prevailing market price, and often with warrants attached, but we have also been able to demand a say over the investee company’s strategy. We have seized on these opportunities and participated in 11 primary deals in H1 alone, providing more than $40m directly to listed exploration and development focused mining companies.
Sustainable approach
Exploration and development companies are working to find and develop the mineral deposits that will be so important for our society going forward, many of which are in short supply. We will continue to be active in finding and supporting those companies that represent the best opportunities.
Jupiter Gold & Silver Fund
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