Appian takes flight with US$375-million mining fund

VANCOUVER — For founder Michael Scherb and his team at London-based Appian Capital, lagging capital markets and falling project valuations in the mining sector present a unique opportunity.

Appian is a member of an emerging private-equity movement looking to bridge a perceived investment gap between short-term investors and long-term mine developers. In late January the group launched its metals- and mining-focused equity fund, with US$375 million in its back pocket.

Scherb laid out his plans for Appian two and a half years ago, when he predicted a dearth of financing that would trigger demand for alternative capital sources for companies looking to bring projects into production. Scherb left his job at JP Morgan Cazenove’s mining team in London, England, with the goal of raising US$100 million. He ended up with offers for US$1 billion.

“For the first time you could have long-term capital available for a long-term industry. Management teams are beginning to understand the limitations of reverse-listing into a shell and backing an early stage project with retail and short-term hedge fund investors,” Scherb comments during an interview.

“I saw the deals being done in that part of the cycle, and they were pure macro deals. And management teams were picking up some pretty bad habits. So I knew when the pullback eventually came — and it was pretty clear it was on the way — it was going to be a significant due to disenfranchisement with the industry. I believe private equity can fill that gap,” he adds.

During his time at JP Morgan, Scherb was a key advisor on 19 mining deals, with an estimated value of US$185 billion. Many of those deals included major mergers and acquisitions initiatives like the Glencore Xstrata (LSE: GLEN) combination, and Rio Tinto’s (NYSE: RIO; LSE: RIO) defence against a US$153-billion unsolicited approach from BHP Billiton (NYSE: BHP; LSE: BLT).

And Scherb brought a deep pool of talent along with him to screen prospective projects and help mining companies develop advanced-stage assets.

Appian’s operating team, which has overseen more than 60 projects to production, includes: Tony Redman, who worked as the group technical director at Anglo American Platinum for over 30 years; Robin Mills, another long-term Anglo veteran, who served as Anglo’s executive director of mining and acted as group technical director at the De Beers Group; and Jos Haumann, who worked at Rio Tinto for 28 years and served as the company’s general manager of exploration in South Africa, Namibia, Botswana, Lesotho and Swaziland.

“I think it is also important to establish that not all mining private equity is created equal. I remember the first time I visited Vancouver there was a lot of skepticism about another private-equity fund springing up,” Scherb continues.

“Appian is different in that we are a long-term investor that seeks to give management teams flexibility. We also have firmly committed capital that we deploy at our discretion, and we’ll be able to assist on the operating and financial sides as well,” he comments. “We actually ‘get’ mining, so I would say we’re more ‘mining investment specialists’ than the typical private investment fund, that is curious about the industry.”

Scherb explains that the group is selective and targets sophisticated investors that have a “long-term angle on mining.” At press time Appian had several investors, though Scherb points out he has access to another US$375 million in co-investment opportunities waiting on the sidelines. He says the group is hoping to mobilize US$150 million in 2014, though it would prefer to invest more.

As for criteria Appian is looking for greenfield or brownfield assets within three years of production located in “selective parts” of the Americas and Africa.

Perhaps the group’s biggest target is Canadian companies and assets, however, where it sees substantial opportunity.

“Canada is really a key market for us. On the commodity side we’ll look at most things outside of iron ore, which is too infrastructure and capital constrained, and we don’t really like the market fundamentals. We also stay away from nickel, bauxite, diamonds and uranium. We’re quite bullish on copper, as we don’t believe that a lot of the large-scale infrastructure projects will actually hit production in the near-term,” Scherb adds.

Early evidence of Appian’s work can be found in Colombia-based gold outfit Red Eagle Mining (TSXV: RD), where the group has invested nearly US$4 million since 2012, and holds a 16.1% equity stake.

Appian also attracted co-investor Liberty Metals & Mining, which made equity investments of US$6.3 million in Red Eagle and maintains a 19.9% stake. Liberty has also bought a 3% net smelter return royalty (NSR) on Red Eagle’s feasibility stage Santa Rosa gold project for US$16 million.

Scherb admits that Appian isn’t really in the market for exploration-stage assets or companies. In fact, he speculates a lot of discovery work is going to be done privately going forward, with companies listing when they have an asset capable of generating investor value over the near-term.

“There’s a beauty in not being distracted by short-term commodity movements,” Scherb continues. “The retail market isn’t there, so what I think you’ll see taking place is that private equity will back a team in the private space until the company is ready to go public. People simply aren’t putting that risk capital into illiquid junior mining companies anymore.”

It’s a business model common in the Internet technology sector, where companies like Facebook and Twitter advance products privately before going public. Scherb points to a number of emerging private-equity groups focused on exploration and project generation.

Another avenue for Appian is asset vending amongst producers, with many majors selling off mines to optimize portfolios. But he notes that these assets are often on the block for a reason, and that Appian will approach them with extra due diligence.

“We see ourselves as sort of private to public arbitrage. So we bring in capital to create the equity story,” Scherb says. “In the end the goal would be to make external fundraising for these public companies a lot easier, because we’ve initiated a management structure and helped professionalize the equity story in such a way to create really compelling retail opportunities.”