THERE will not be any significant immediate term funds to come out of China for magnetite iron projects in Australia or internationally, according to advisory firm PCF Capital, which also warns of pending swings in global competition for exploration funds. The market changes also raise the spectre of ‘shadow bank’ operatives becoming a temporary force in mine project funding – but at much higher risk than conventional bank-based debt.

Addressing the Paydirt 2014 Latin America Downunder Conference in Sydney earlier this year PCF Capital’s managing director Liam Twigger said current market dynamics pointed to China not being expected to back any new magnetite iron projects for at least five years. “China has two magnetite projects in Australia that it is struggling to get fully commissioned amid cost blowouts and other challenges – Citic’s Cape Preston Project and the Karara JV and a third being the development of Sino Iron’s Extension Hill.

“Until these projects actually get up and deliver, there will be no more Chinese backing for magnetite projects either in Australia or overseas. The good news is that the market now knows a lot more about magnetite operations and the detail required in feasibility studies going forward.

“The only ones with any chance of success in attracting capital will be those with a measureable pathway to production and some relativity between the sponsor’s market cap and the amount of capital needing to be raised.”

Liam Twigger said this prevailing mood swing came at a time when Australia was trying to get a number of long mooted magnetite projects off the ground and into mining and export. “Equity markets are now on the cusp of a turning point and magnetite aside, Australia should continue to present compelling value within the mood shift. The top tier investment sentiment will swing heavily and dominantly behind gold, copper and nickel.”

He warned however, that a collapse in market appetite for capital raisings via predominantly placements and rights issues, and to a much lesser extent, IPOs, was seeing a material increase in companies seeking debt and increasingly accessing this from non-conventional sources allowing the emergence of ‘shadow banks’.

“For ASX investment, the value of placements and IPOs is down from around Aus$107 billion in 2009 to barely Aus$14 billion or so in the first half of 2014 – few of which have been mining plays. Equity has become hard to come by and entities are borrowing more to minimize shareholder dilution.

“On a global basis, this same capital starved trend has seen equity and debt raisings for gold and base metals fall 50% over the past four years from around US$23.6 billion in 2010 to barely US$8.5 billion in 2013. The mix of capital access has also changed in this time from 70% equity and 30% debt, to now around 50:50 equity and debt.

“Within this, we have seen shadow banks emerge – basically metal trading and offtake parties as well as metal streamers which don’t have to operate within the regulatory and prudential constraints of traditional banks. They operate quickly and can provide large chunks of cash in return for offtake and marketing rights.

“The big unknown, however, is how these trading houses will act when things get tough – as they increasingly are – and that should worry project owners going down that route or considering such a credit line possibility.”

Liam Twigger pointed to Latin America’s sustained investment appeal and mining performance over this period – and he expected it to continue to be so. “At a time the global exploration spend is down 60% compared to its all-time high in 2010, Latin America on a regional basis, will continue to dominant global exploration spend and be at the forefront of new investment rallies – particularly as it presents a premium pricing for gold projects.

“On a one year average, the market is now paying up to four times to buy into a Latin American gold project – somewhere around US$86 an ounce – compared to only US$22 on a global basis.
“Even on a three year average, the gold premium is more than double for Latin America at US$70 an ounce compared to US$37 globally.”

He pointed to new data showing Latin America remains at the forefront of global exploration appeal, accounting for 27% of last year’s US$14.4 billion spend – with gold dominating that activity – some 46% of budgets.

“In short, Latin America has retained the mantle as being the number 1 region for exploration expenditure for the past 20 years and this trend should continue.”