As the president and CEO of Prime Business Capital, what do you consider when evaluating potential investment opportunities?
Prime Business Capital is a boutique private equity company based in Johannesburg, South Africa. We invest across sectors. But because the topic today is about mining, which constitutes about 55% of our activity, we will focus on mining.
What are some key criteria you consider when evaluating potential investment opportunities in the mining sector?
One of the primary factors we consider is the management team. The quality of the management team is very important to us. And by quality, I’m referring to the qualifications, the experience, the track record. We look at those things because the jockey behind the project can give you confidence as to whether they will achieve their goals or not. So that’s the first thing we consider.
Secondly, we consider the geological potential. By geological potential, I’m talking about the mineral deposit size and the grade. Those two are key to determining the viability of a project. And then of course, we look at the LOM, the life of mine. The life of mine is very important for us to know how long our investment in this particular project is going to endure. We also look at the geological geometry and its continuity. That’s very important. Economic viability of the project is also a key component. By economic viability, I’m talking about the commodity market price. When we invest in a particular mineral, we want to know the historical performance of that mineral over a certain period and the outlook going forward.
And then of course, we look at your production costs. What are your plans or what have you budgeted or forecasted for on your mining and processing costs? That’s very important because that has to be properly planned for. If it’s not, and that’s going to determine whether your operation is successful or profitable.
And then of course we look at ESG factors. ESG is a very important component for investors across the board, particularly, in mining. And when we talk in ESG, we’re talking about the environmental impact that your operation will have on the environment. We’re talking about social and community impact. We are talking about stakeholder consultation. Does your mining plan articulate all these items? BWe have seen operations that have encountered problems with communities because there’s never been proper planning to engage local communities when mining companies come into a particular area. So we look at that as well.
The regulatory environment is also very key. I’m referring specifically to the mining licenses and permitting. And we look at the land tenure. What is the regulation that articulates land tenure and the issuing of mining licenses? We have seen mining projects that have encountered problems, where they would’ve started with an exploration license, but when it come to a point where they have to convert the exploration license into an exploitation license, there are problems. We look at certain projects on the subcontinent and we have seen that happening.
Technical feasibility is very important for us. By that we are referring to the mining method. Is this going to be an open pit mining operation or is it going to be an underground mining operation? This impacts on your production costs significantly.
We look at the infrastructure. What infrastructure do you have in the area where you will be mining? We look at access roads, access to power, access to water, etc. All of those components are very important.
And of course we look at the geopolitical stability of the jurisdiction where we are going to be investing. If you look at certain countries where there is instability, we try to stay away from those countries even though we may have seen opportunities in those countries, but we avoid those jurisdictions.
And then finally, we look at the financial modeling. By financial modeling, I’m talking about what is your capex? Is the project over budgeted? Is it undercapitalized? Or is it overcapitalized? We look at the NPV and your IRR. Obviously, the higher the IRR for us, the more attractive the project is.
And then of course we will look at the payback period. If we come in at a specific period or time, how long do we envisage to be there throughout our investment? Nominally we would be looking at a period of about three to five years for an investment. So, this is not a conclusive list, it’s just some of the key factors that we look into when you do an investment.
Prime is obviously very thorough in its search for investment opportunities. Do you ever feel like it’s like trying to find a needle in the haystack trying to hit all of those boxes? Are you a bit more lenient on some factors over others?
This is key. And we have to tick all the boxes because at the end of the day, we’ve got to ensure that our investors, who have been promised returns over a long period, we have to make sure that we deliver on those returns. These are long-term investments and we must make sure that we tick all the boxes.
You mentioned that you focus on the track history of the mineral. How do you choose specific commodities? What do you focus on?
We invest in a number of minerals across the board, but the minerals that are of interest to us at this stage are the critical minerals. We know that when we talk about critical minerals, there are various lists about critical minerals. Some include gold, some include the battery minerals, etc. But our focus is on critical metals as it refers to lithium, copper, nickel, and cobalt. These are the key minerals that we would like to invest into.
The demand for critical minerals is going to increase over time. And these are key minerals because they are main minerals that are used in digital transition technologies. So you can expect the increase in demand for these minerals going forward. For instance, a wind farm uses nine times minerals than a natural gas plant. If you look at EVs, they use six times more minerals than the combustion engine technology, which uses only one mineral. So the demand for these minerals, without a doubt, will increase with time.
We also consider the impact that these minerals will have on net zero effect. If you’re talking about net zero emissions, these minerals are very crucial in ameliorating climate change. Look at the floods in Spain last October. Look at the devastating fires that have happened in Los Angeles. And you ask yourself what impact can the world benefit from in using these minerals going forward? And that’s what’s going to happen. That’s why our preference at this stage it’s on those four critical minerals I listed earlier.
With changing technologies and battery chemistries, how do you switch your focus to different commodities? Does it depend on the markets?
I don’t see a change in the use of lithium going forward. Lithium is a very dominant and a very unique mineral. But of course, when you talk about cobalt, there has been chemistries that are trying to not to use cobalt in their batteries. So with the other minerals, there will be changes going forward with research and technology, and we do foresee that some minerals will be left behind. But for me, lithium will always be there.
Are there any upcoming projects across Africa that have caught your eye recently?
At the moment, we are looking at a number of projects in Southern Africa, in particular, in Namibia. We are looking at what they call the Karibib Pegmatite Belt. There are a number of lithium projects there, and most of them have not come into stream as yet.
We are also looking in the DRC as well. When it comes to lithium, we are looking in the Tanganyika province, which is a very prominent province that produces lithium. In fact, it has the biggest undeveloped lithium deposit in the world. So we are looking at that as well. But then of course, we are also looking in West Africa. We are looking in countries like Senegal, like Burkina Faso, like Mali. But as I mentioned earlier on, the political stability of those countries is of utmost importance to us. We just have to be sure that we investing our investors funds in a country that is stable enough.
We’re here at Mining Indaba today. What discussions are you most looking forward to whilst spending your time here?
Well, I sat in on a discussion this morning that was looking at what Africa can learn and the infrastructure potential for Africa. And what Africa can learn from what Brazil has done in using the PPP model to build infrastructure. This discussion was led by Anglo American, and there was a law firm also from Brazil and Rio Tinto. The main thesis of this discussion is that Africa needs to improve its infrastructure in order to facilitate transportation of minerals from locations to ports. Look, for instance, the Lobito Corridor, how the Lobito Corridor once is fully developed can benefit a country like Zambia. Zambia at the moment, is exporting most of its minerals in the East from Solwezi to Dar es Salaam, from Solwezi to Beira in Mozambique, from Solwezi to Durban in South Africa.
The average distance from Solwezi to those destinations, to those ports, it’s 2,700 kilometers. Whereas, the distance from Solwezi to Lobito is about 1,800 kilometers. That can be huge savings. So the infrastructure, rather the PPP model that has been used by Brazil to support mining projects has been fantastic. So that was quite interesting to me.
