Market Update from James McClements

Instability and volatility has characterized the resources industry in recent times as companies grapple with the impact of sustained low commodity prices, delays in the onset of supply discipline and uncertain global growth prospects.

Whilst the current market is not unusual for a cyclical industry such as resources, it does not make the situation any less challenging.

More recently, we have seen an increased level of optimism that has not been present for some time. While there are some positive indications that the market may have found a bottom earlier in 2016, I believe a sustained recovery is not imminent.  The key to understanding this market is differentiating between a demand driven and a supply driven market.

Impacts and influences on the current market environment

Throughout the decade to 2011, we saw a demand driven episode which David Jacks describes in his paper, ‘From Boom to Bust’, as an event closely linked to historical episodes of mass industrialization and urbanization which interact with acute capacity constraints[1].

This spike in demand was a catalyst for intense capital investment which eventually saw a supply surplus introduced to the market. This excess supply and slowing global growth in US dollar terms has culminated in heavy impacts on commodity prices. The strengthening US dollar has exacerbated excess supply in domestic dollar terms in commodity driven economies. Slowly, we are seeing signs that a correction across the industry is occurring, where supply and demand are recalibrating, and some commodities have seen limited price recoveries.

Mixed views remain as to when and to what extent the mineral commodity prices may start to recover sufficiently to incentivize idled capacity or even new supply to enter the market. An indicator that I find compelling is the correlation between commodity prices and the growth in global GDP. This point of view suggests that commodity demand is a function of global GDP, rather than solely linked to any single economy (e.g. China) and that as global GDP increase, demand for commodities generally increases over the medium-term. Copper is often used as proxy to demonstrate this effect; with the added advantage that copper is historically sensitive to early stage recovery trends.

[1] David S. Jacks, ‘From Boom to Bust: A Typology of Real Commodity Prices in the Long Run’ Revised March 2014




Source: IMF data, AME, Bloomberg, RCF analysis, February 2016[2]

 [2] Information shown for Copper is used for informational and demonstrative purposes only.  Each commodity will be subject to its own facts and circumstances which may make it more or less likely to align with the example provided.  This information should not be deemed to be a recommendation of any specific commodity, company or security.  This chart includes forward-looking information, and we caution you that such information is inherently less reliable.  Actual performance will vary due to a variety of factors, including general economic conditions.  Any projections have been prepared and are set out for illustrative purposes only, and do not constitute a forecast.  Any projections or opinions are current as of the date hereof only.  The statistical information provided herein has been supplied for “informational purposes” only and is not intended to be and does not constitute investment advice.  Neither RCF nor any independent third party has independently audited or verified this information.  RCF disclaims any and all liability relating to such information, and no representation or warranty is made, expressed or implied, as to the accuracy or completeness of the information provided in this presentation.


Following the copper growth trend line

While China’s impact and influence on commodity markets is certainly significant, RCF takes a more holistic global view of supply and demand trends. Generally, what the relationship between global copper and GDP growth demonstrates is that mine supply and nominal commodity prices rise over time, and must do so if demand is to be satisfied.

The China growth story is likely to continue yet perhaps not at the rates we have witnessed previously and it is also likely that price volatility will continue. Recent, long dated research by Paul Gait at Bernstein highlights that, ‘As the lead times and technical and social complexity of delivering the incremental unit of supply increase, we expect to see a continuation of the high levels of price volatility seen recently’[3].

We agree with this view and feel that commodity prices are going to experience higher levels of volatility in the next 1 to 2 years.  The industry is still in a period where demand and supply imbalances are adjusting, however, it is important to note that this is a supply-driven bear market; it will not trade like a demand-driven market. In the current market, demand hasn’t really changed, only its rate of change has decelerated. For prices to sustainably rise for current levels, it will take lower prices to push and keep supply below current demand levels, which are growing but more slowly than in the past, to create a deficit. As a result, higher prices are not likely to be sustainable in the near-term because supply, in the form of excess capacity, is primed to return with higher prices. It is likely that we will experience a number of false starts before demand eventually overtakes existing supply capacity, which will mark the starting point of the next sustained upcycle.

[3] Bernstein: Gait, Floris and Absolon, ‘European Metals & Mining: Boom and Bust and Back Again, 246 Years of Copper Price Cycles’ January 19, 2016

RCF sponsored UWA Business School wins sustainability and value creating competition at PDAC

For the second year in a row, the RCF sponsored University of Western Australia (“UWA”) Business School has won the Schulich International Case Competition at the Prospectors & Development Association of Canada (“PDAC”) convention in Toronto.

The competition requires University and Mining School teams from around the world to submit an essay in response to an industry related question. The top 20 teams travel to Toronto to present their reasoning to a panel of industry judges before the top four teams compete in front of a larger audience at PDAC convention.

In this years’ essay question, competitors were required to identify, ‘What are the most important factors contributing to sustainable strategies for mining companies?’

RCF Managing Partner, James McClements, said that the competition was a valuable way to explore how young people entering the mining industry can create value by prioritizing mining project investment and in the process create sustainable strategies.

“RCF is very proud of the UWA Business School team, who as the next generation of mining industry professionals are making valuable contributions to mining investment and sustainable strategies,” said Mr McClements.

“The competition explores the concept of strategic investment and that mining projects, particularly in today’s challenging metal price environment, face difficult decisions about how to allocate capital to a wide range of initiatives to ensure their sustainability today and well into the future.”

“Sustainable strategies include all aspects of a business from sound environmental management practices through to prudent financing strategies. Sustainable companies do not view any one of these decisions in isolation. Good companies make good decisions across all aspects of their business.”

UWA Business School’s 2016 team was called ‘Team Manganese’ and comprised Matthew Horgan (Team Captain), Timothy Andrews, Jessica Volich and Jessica Harman. First prize was C$10,000 and it was the business school’s second consecutive win and in 2014, their first year of entry, they were runner-up. The RCF sponsorship included travel and accommodation for the competitors to Toronto from Perth, Australia.

MZI Resources Ltd. Completes Commissioning and First Product Shipment to Customers

Resource Capital Fund VI L.P.’s (“RCF VI”) portfolio company, MZI Resources Ltd., announced recently that it had completed commissioning and exported the first shipment of mineral sands at its main Keysbrook and Picton plant facilities in Western Australia.

MZI Resources’ shareholders initially approved a $58 million funding package from RCF VI in November 2014, negotiated to support the company’s completion of construction, commissioning and ramp-up at its Keysbrook project through to full production and positive cash flow.

On December 21, 2015, MZI Resources announced its first shipment of Keysbrook mineral sands to customers, approximately one month ahead of the original schedule. Commissioning was completed under budget several days earlier.

RCF Principal, Chris Corbett, said that the firm is pleased to support MZI Resources, particularly through the integral construction phase to the project completion milestone, which will eventually enable positive cash flow for the company.

“RCF is a strategic partner that consistently supports companies throughout market cycles and given that resources is our passion and our area of expertise, it’s always particularly positive when a company that we’ve supported through the development stage begins production,” said Mr. Corbett.

Please visit the MZI Resources website for more information and to read the full company release.

Strategic Investments Provide Valuable Dimension to RCF Portfolio

When RCF began investing its first fund, the US$41.4 million (M) RCF I almost two decades ago, investments ranged up to $7.7M in size. With US$2.04 billion available to invest in Fund VI, it would be easy to ignore smaller opportunities.  RCF, however, continues to make investments at these levels for a variety of reasons.  These particular investments look for opportunities where a strategic benefit can be gained and may be from any number of areas such as a new commodity or country, an attractive opportunity not yet ready for material funding, or a new deal structure.

As the funds have grown substantially over time and the size of the investments increased significantly to include more advanced projects, RCF has made a conscious decision not to exclude strategic investments from its portfolio which make valuable contributions to the pipeline of new projects in the industry.

RCF Partner, Peter Nicholson, explains that as with any potential opportunity, RCF has the innate ability to be flexible and it is far better for potential portfolio companies to approach the firm with what they need to succeed rather than RCF try and define what may suit.

“When it comes to strategic investments, the benefits for RCF and our portfolio companies are numerous and include the opportunity to establish a relationship and understanding of management teams in the very early stages of a project’s development,” said Peter.

“We also have a deep understanding of a variety of countries as an investment jurisdiction and can support a company’s strategy as their projects are advanced, including the challenges presented throughout exploration, development and funding options through to cash flow from production.”

“Some of our strategic investments made to date have allowed us to gain an understanding of operating in countries such as Russia, India, Cambodia and the UK; with RCF being the driving force behind the first hard rock metals mine development in England in 45 years.  That particular investment, Wolf Minerals Limited, started as a strategic investment into study work of US$1.8M and has resulted in an RCF investment of US$105M and the mine commissioning in late 2015.

Strategic investments remain an important part of the firm’s investment consideration process and remains committed to exploring investment opportunities regardless of initial size.  Since RCF I in 1998, RCF has consistently invested in mining companies throughout market cycles and operates the firm with integrity, discipline and a view to creating long term value for all stakeholders.

Partner Profile, Pete Nicholson

Pete Nicholson is one of RCF’s seven partners and is responsible for running one of RCF’s two Perth deal teams.

I’ve spent thirteen years with RCF now and in my current capacity head up of one of our two Perth based deal teams. Each deal team is responsible for identifying and sourcing new investment opportunities as well as managing our existing investments and making sure the right communication is happening, funding time frames and expectations are met as well as completing technical due diligence and legal obligations as part of our investment process.

Our philosophy when it comes to managing our investments are a ‘cradle to grave’ responsibility, so that when you start out with an investment it’s your responsibility to facilitate it all the way through. We don’t have someone who sources, and then someone who executes and someone who manages, it stays with us the whole way. We do this because we don’t walk into a deal thinking ‘we’ve done our due diligence so we know everything’, we understand that it’s necessary to spend anywhere up to 12 months with a company before you really understand how they operate. We think that by having the same person involved the whole way through the process provides continuity and learning which can be built upon for a better outcome for all stakeholders.


Pete has an undergraduate degree in engineering from the University of Queensland and started his career as a graduate with Western Mining Corporation (WMC) before undertaking a variety of operations roles and later becoming the company’s Underground Manager at its Longshaft mine. At a subsequent role with Canadian based nickel producer LionOre at their Western Australian nickel project, Pete was responsible for constructing the mine and its infrastructure.

Starting out as a graduate at WMC, it was necessary to complete 12 months’ underground experience in order to obtain your first class mine manager’s ticket. This included haulage, handing explosives, drilling and mobile plant operator among other roles to provide a well-rounded understanding of the underground mine operations.

After the initial 12 months, I went on to become a production and ventilation engineer and later moved into different planning roles, then shift boss for a while before becoming the underground manager at Longshaft. When the operation was flagged for sale, I left to join Canadian company LionOre and as Registered Underground Manager had significant responsibility for construction and development of the Emily Ann nickel mine.  I was on site during the year it took to take the project from a set of feasibility documents through to production, overseeing construction and commissioning.


Having completed postgraduate study in applied finance, majoring in investment analysis and a diploma in financial planning, Pete joined RCF as an analyst in 2003. Pete credits the valuable experience gained in his underground mining roles with being able to provide cost savings and advice on efficiency to portfolio companies.

Pete: Using the underground experience I’ve gained, we were able to help an investment held in Peru optimize its operations by improving its processes to reduce costs and increase production. The company was an existing operator with a number of underground mines and were very good miners but were insulated and unaware of what was happening at a global level. Understanding mining at an operational level helps to quickly identify not only the practical issues and risks faced by companies, but also to recognize the opportunities available.

Ultimately RCF take the view that whilst our capital is the same as the next investors we hope to provide more than just dollars and the sensible question that should be asked by any company is ‘why should I take RCF’s dollars ahead of somebody else’s?’ The real differentiator is that our people have a unique skill set, we’ve been in mines and we’ve operated mines and can add value to our portfolio companies beyond simply providing funding.

As an organisation, RCF has held majority ownership in mines and assisted management in both set up and operation of mines, we really understand the industry and don’t get frightened by short term issues whether it be macro issues concerning commodity prices or foreign exchange rates or micro issues that are mine centric. We understand that it is helpful to have someone who has completed their due diligence and understand a good asset.  Rather than walk away from an issue we’ll work through it and use our global network in terms of other means of raising debt or equity and providing advice on the best approach. It’s our depth of experience across the financial and resources industry that really sets RCF apart.


During his time as Captain of the First Response Mines Rescue Team on site in Kambalda, Pete recognized the important contribution mining operations can make to the community in rural locations.

For eight years after I graduated, I worked across nine different mine sites, living both residentially and in a fly in fly out role. I recognize the importance of the provision of services to remote or rural communities that the development or presence of mining often brings. During my time living in Kambalda, I was the Captain of the First Response Mines Rescue Team. This involved providing emergency response not just for any incident on site but providing back up to the community’s emergency services. During this period, I was also a volunteer fire fighter and a qualified industrial ambulance officer.

I was lucky enough to meet my wife during my time in Kambalda. She is a geologist and was working as part of the exploration team at another site. Personally, I found that I preferred being residential over having a FIFO roster during my time working on site as a Mining Engineer. Living as part of the broader community has its advantages in terms of quality of lifestyle, although it is not always a possibility for some companies or locations.

RCF Provides Talon Metals US$15 million to Further Tamarak Project

In late 2015, Toronto Stock Exchange-listed junior developer Talon Metals announced it will use the US$15 million it received from Resource Capital Funds to earn an 18.45% interest in Rio Tinto Group subsidiary Kennecott’s high grade Tamarack Nickel-Copper-PGE Project, located west of Duluth, Minnesota, USA.

Talon CEO Henri van Rooyen said that the entire US$15 million will be used by Kennecott to advance the Tamarack Project, with planning already underway for the next phase of exploration. Talon’s technical team works collaboratively with the Kennecott team in planning programs and interpreting drill results, utilizing cutting-edge geoscience to drive decision-making.

“We are now one of the few junior exploration companies that is fully funded with the ability to progress exploration on an expedited basis” said Mr. van Rooyen.

RCF’s funding includes US$1 million by way of a private placement for Talon common shares at a subscription price of C$0.12 per common share, and US$14 million via an unsecured convertible loan at a conversion price of C$0.156 per common share.

RCF Managing Director, Canada, David Thomas said that the firm was pleased to support Talon in achieving its strategic goal of obtaining an interest in the Tamarack Project.

“RCF considers all opportunities, ranging from early-stage exploration projects to producing assets and in this instance we’re assisting Talon in obtaining meaningful ownership in an exciting project in partnership with a major mining company” said Mr Thomas.

In a separate release announcing Talon’s shareholder approval for the RCF financing, Mr van Rooyen stated that its completion was a major milestone for the company.

Please visit the Talon Metals website for more information and to read the full company release.

Bannerman Resources Shareholders Approve Company Restructure

Bannerman Resources Limited recently announced the acquisition of full ownership of its uranium asset, Etango, in Namibia, and a debt free balance sheet.

The resolutions, which were all endorsed by shareholders at the company’s Annual General Meeting in December 2015, included a transaction with Resource Capital Funds to raise A$3 million through an equity placement and to convert A$12 million of debt into equity and a 1.5 per cent royalty over the Etango project. Following the transaction, RCF now holds 38.3% per cent ownership of Bannerman Resources.

In addition to the transaction, further resolutions passed included a share acquisition by Bannerman Resources to obtain 100% Etango ownership and performance rights issued to Chief Executive Officer Len Jubber.

Bannerman Resources Chairman, Ronnie Beevor, in his address to shareholders said that the transactions with RCF deliver a debt free balance sheet with new funds that allow Etango to be taken to the next stage.

“Importantly, Bannerman has now established a sound project platform for extensive engagement with the global nuclear industry,” said Mr Beevor.

RCF Principal, Chris Corbett, said that RCF was pleased to engage with Bannerman Resources and support the company through to its next stages of development.

“RCF partners with portfolio companies to build strong, successful and sustainable businesses that strive to produce superior returns to all stakeholders and we’re pleased to be engaged with Bannerman Resources to help to achieve the strategic goals of the company,” said Mr Corbett.

RCF employs a range of investment styles and works with management teams to structure transactions that reflect the risks and opportunities associated with each company.

To read the full results of meeting and Chairman’s address from Bannerman Resources please visit their website.