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23 September 2015

Miners and Bankers - an Unholy Alliance

I think the mining community must be the most optimistic bunch of people on earth. After all, they look at the dirt in a hole in the ground and convince themselves that if they dig it out, bash it around, float it and heat it (roughly speaking) they will end up with something that others will pay good money for. The degree of uncertainty is large, and is always there; I know there are surveys, magnetic images, test bores and all the rest of the high-tech resource calculation techniques, but the truth is only clear once the digging has begun, however positive the tests may appear. So you’ve got to be optimistic, you’ve got to believe that the earth under your feet - this time, please, this time - is more than just a pile of dirt.


I have many friends in the mining industry, technical people, commercial ones and also those involved in what can only be described as stock promotion. The technical ones are the most down to earth; yes, they are optimists, but it’s tempered with scientific scepticism. The surveys and tests are promising, but we can’t be sure yet. Curb your enthusiasm. The commercial people are more up front; of course the project is good, we’ve got great preliminary results, it’ll only be a matter of weeks until we see the true strength of this deposit. It’s a wonderful opportunity for you to sign an early off take deal - get in first - oh, and perhaps make a small pre-payment… But the most positive of all are the promoters. These are the people who can wax lyrical about the rights they have fifteen hundred miles up the Amazon - or similar - which need a government to decide to build a railway before the ore, which may be there, possibly, could even begin to be exploited. Or the one who has a fantastic deposit - best mineral content you’ve ever seen; oh, don’t worry that it’s in the middle of a war zone. Or the oil they know is just under your back garden, or your bit of farmland. The optimism goes on and on.


And what happens to these great waves of optimism? Well, they crash into the (often) immovable rocks of the financing banks. Here we see the diametric opposite; here we see those whose natural stance is extreme pessimism. Again, they come in different shades. The dealmakers want to see realism, they want to know the project is sound - but they can be swept along by the sponsor’s enthusiasm. Then there are the mining engineers the banks employ; their view is usually negative, because the proposal is not how they would have written it themselves (forgetting that they gave up that sort of thing when they sold out to the lure of the regular banking salary). But then, the final hurdle for any mining project - the credit committee. These are the most pessimistic of the lot; no, they’re being too optimistic about their ore grades, their cash flows, their time to production. Lend them money? You must be joking. (Incidentally, the best credit committee story I have was at a respected investment bank, where, sitting on the committee one day, which was discussing a loan to a property developer, one of my senior colleagues announced that we couldn’t possibly advance money to this man, because he had shown up at the bank one day in a yellow Ferrari - just imagine! Not our kind of borrower at all.) Anyway, that’s the big hurdle for the mining project.


But flippancy aside, the remarkable thing is that these two opposed views do work together. Without the (sometimes insane) optimism of the miners and the stolid rationality of the bankers, we wouldn’t have a resource sector. Rio, BHP, Anglo - they all began from somebody believing there was a lode to exploit and they all developed with the use of outside capital. Despite the seeming incompatibility I’ve suggested above, the resource sector is a model of success. One has to try and remember that and keep things in perspective when the FTSE is dropping like a stone because the resource stocks which are such a significant part of it are being trashed again; good times follow bad times, and bad times follow good. 

It’s all cyclical - that’s what I tell myself, and I guess I tend more to the optimism of the miners - without the technical knowledge, of course.

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