London-based Tembo Capital raises US$380 million for third mining fund

In October, U.K.-based Tembo Capital, a leading investment advisor in the metals and mining sector, closed its third mining fund with commitments of US$380 million. The fund will focus on metals in tier one mining jurisdictions that are critical to decarbonisation and the green energy transition such as copper and nickel. Tembo has completed three investments in the fund so far: Arizona Sonoran Copper Company (TSX: ASCU), which IPOed on November 16 and has a brownfields copper project 64 km south of Phoenix; Maritime Resources (TSXV: MAE), which owns the Hammerdown gold project in the Baie Verte mining district of Newfoundland and Labrador in Canada; and Cherish Metals, where Tembo and Black Mountain Metals created a strategic partnership in September to jointly advance the Lanfranchi mine in Western Australia. The nickel sulphide mine has been on care and maintenance since 2015, but previously produced 3.85 million tonnes of ore at an average grade of 2.45% nickel between 2005 and 2015.

The Northern Miner recently spoke with Tembo Capital’s CEO David Street about the fund and what kinds of companies and projects it is looking for. Street was one of three partners that founded the firm in 2014. Tembo created its first mining investment fund in 2014 and its second one in 2016. Investments in those two funds included Ero Copper (TSX: ERO; NYSE: ERO), which is focused on copper production growth from its MCSA mining complex in Bahia State, Brazil, and Marimaca Copper (TSX: MARI), whose flagship asset is the Marimaca copper project in Chile’s Antofagasta region.

TNM: Before we talk about the third mining fund, can you tell me about the two funds created in 2014 and 2016 and how they may differ from the third fund?

David Street: The earlier funds invested in a whole series of public and private mining companies but mainly focused on emerging markets, particularly Africa and Latin America. The new fund, which is quite a bit bigger at US$380 million in total commitments, is the first global fund we’ve done and for that reason we’re more focused on North America than we have been in the past.

TNM: How much money did you have in the first two funds?

Street: It was around US$350 million between them.

TNM: What kinds of funds are they?

Street: These are private equity funds, typically ten year closed-ended funds, and so we can afford to take a fairly patient, long-term strategic approach with the investments we make.

TNM: Why is the third fund focused on North America?

Street: We’ve always wanted to do more things in North America and in more developed countries. Some of our largest investors in the early funds were focused on Latin America and Africa, and that was the reason for the previous focus.

For example, Ero Copper in Brazil was in the earlier fund. We were one of the biggest private investors in Ero Copper and at the IPO we were the largest shareholder. Obviously, that’s been a fantastic company and it goes from strength to strength. The team has done a fantastic job. We first invested in it in 2017 and it did the IPO later that year.  

TNM: What is your strategy?

Street: We’re not looking to acquire companies or assets outright, we typically like to take a strategic shareholding — 10%, 20%, 30% or so — and then we like to try and help those companies to grow. We typically invest $20-30 million and it’s not necessarily all in one go, we can make investments in stages, which can be more helpful. We help companies add value — it’s a long-term growth capital strategy.

TNM: Is it fair to say your investments in a company are usually between US$20 million and US$50 million?

Street: Correct. We’ve got a number of good technical people within the group. I’m a mining finance person by background. I previously worked for Rothschild in London and in Denver for a while. I also worked for Endeavour Financial and Endeavour Mining in its early stages, so we do have a lot of good contacts to source investments.

TNM: You’re currently one of the early investors in Arizona Sonoran Copper. It has a really strong copper brownfields project on private land in Arizona. Their CEO George Ogilvie spoke about the project at The Northern Miner’s recent Global Mining Symposium on November 17. They bought it out of a trust and at that time the project had already invested significant amounts in reclamation. And it’s on private land, which means permitting is going to be a lot simpler.  Can you talk about what you liked about that investment?

Street: We invested in the company privately and we’ve been the biggest shareholder in it so far. It’s a great opportunity. They managed to piece together all those properties and negotiate with the trust, and we funded the acquisition of the properties out of the trust in July 2020 when we invested initially.

TNM: What do you like so much about Arizona Sonoran Copper and what percentage of the company do you now own since their IPO?

Street: There was a huge amount of technical data and work done historically by Asarco, which really gave the company a head start. It’s a great opportunity given the existing orebodies, location and low capital cost to restart production. After the IPO we will own 39% of the company.

TNM: Your third mining fund has also invested in Cherish Metals, which has some interesting nickel assets in Australia. Can you tell me more about that company and why you selected it?

Street: Yes that’s a private nickel company and we’ve partnered with Black Mountain Metals, another investment company, which is based in the United States. Together we each own 50% of Cherish Metals, which owns the Lanfranchi mine in Western Australia. This is quite a prospective nickel sulphide asset, which was previously mined a number of years ago, so it’s an interesting investment. We think there could be some good upside with the application of more modern exploration techniques and it’s well located in a primary nickel producing region. It’s tough to find nickel sulphide assets in the current market.

TNM: Many companies are still having trouble raising money, which means it’s a great time for groups like Tembo to get in early.

Street: Yes I think it is really hard for many companies. There does seem to be a shortage of capital in North America for some of these assets and particularly in the Canadian market, so we’re seeing a number of good opportunities.

TNM: What are you looking for in terms of metals?

Street: We’re particularly focused on copper, we like nickel, we look at gold and other metals. We think the fundamentals are very strong, particularly for copper and nickel given decarbonisation and the rollout of electric vehicles. Obviously we’ll look at other metals as well.  We quite like mineral sands as a commodity.

I think the fundamentals for the mining sector overall look pretty good here. And I think it’s a really good opportunity for us being able to raise this capital now — US$380 million. Our investors are mostly from the United States; long-term endowment-type investors, including some quite big ones. And they’ve obviously seen the opportunity and are interested in the decarbonisation theme as well.

 

TNM: Can you talk about the investments in the third fund and how much money you have left in the fund now?

Street: Arizona Sonoranand the Cherish deal are the two main ones so far. We’ll probably invest in ten to fifteen companies, in the fund. So relatively sizeable positions. And they’ll be long-term investments. We often make an initial investment, and then follow on in a number of additional tranches as the company grows and develops its assets. But it will be a relatively concentrated portfolio of probably ten to fifteen companies.

TNM: Beyond the first three companies in the third mining fund — Arizona Sonoran, Cherish Metals and Maritime Resources — are you getting close to making any other investments?

Street: Well, we certainly hope so. We’re excited about the opportunities. There are a lot of companies out there with interesting assets both in the public and private markets. We typically invest mainly in equity; sometimes we also do convertible loan notes and potentially royalties as well.

TNM: Can you tell me more about the first two mining funds?

Street: To give you an idea, we invested in thirteen companies in total. One of the Canadian ones you might be familiar with was Marimaca Copper, which is in Chile, and was previously called Coro Mining. We invested in that one back in 2018, and so we’ve been an investor in that for three years or so. Initially we bought about 15% of the company through a placement and we have followed on a number of times in that investment. But that’s a really good example of the type of asset that we look for: a low cost asset, good location, great infrastructure, relatively low capital intensity, good grades. A copper asset that should grow bigger and develop into something that should be on the radar of some of the bigger copper producers, in time.

TNM: It’s getting harder and harder to find good copper assets with good grades.

Street:  It is but I still think there’s lots of opportunity. You have to be quite selective. We look at probably hundreds of assets a year, but we’ve got a good team of people here, with three geologists, a couple of mining engineers, a metallurgist. So we do screen a lot of things, and we’re very selective. We’re probably making, on average, two or three investments a year. We do a high level of due diligence on the companies we invest in.

TNM: Do you feel any pressure to move quickly? Do you feel like it’s a race against rivals to find the best companies? Is the competition fierce?

Street: There is competition but not so much from other funds like ours. Generally the competition comes when the equity markets are running and are stronger. As you know, the broader equity markets tend to open and close and so typically there will be more opportunities for us to invest when the broader equity market perhaps isn’t quite so strong. And I think we can present a quite convincing case to management. For a company that’s let’s say is doing a feasibility study, they’ll probably have two or three or four rounds of funding before they get into production. And the types of management teams we work with often view it as a big advantage to have a supportive shareholder like Tembo on the register with a relatively sizeable position — say a 10% to 20% shareholding.

TNM: Do these companies typically find you or do you find them, or is it a bit of both?

Street: We do proactively go out and speak to people we know or assets we’re aware of. When we were looking at the Marimaca asset a few years ago in Chile, we looked at a whole range of assets in Latin American copper. We wanted to do more copper at that time in our portfolio, so we went and looked at a whole range of companies through our contacts.   We also see a steady flow of companies who approach us either directly or through intermediaries.

TNM: What do you think ultimately the breakdown of metals will be and are you considering investing in other commodities — things like cobalt, lithium, graphite?

Street: That’s a great question. We are focused more on mainstream metals. We are very interested in the metals that are behind the electric vehicle, decarbonisation themes that we’re seeing at the moment. But that said, we are more focused on the bigger markets, the more liquid metals, and so obviously that draws you to copper and nickel and possibly some of the other base metals. We’ve spent a lot of time looking at lithium. We are interested in lithium but are being very selective. I think some of the other markets, like graphite, can be quite niche. And so I think those are probably of less interest to us.

We have done well in gold investments in the past. In our previous fund we were invested in a company called Toro Gold, which was a private gold company, which was bought a few years ago by Resolute Mining. So we’ve successfully invested in gold over many years. And I think with what’s happening with inflation at the moment, this could again be a good time to look at some gold assets within this fund. I would expect we’ll have copper, gold and nickel in this fund. And then a few others would be things like mineral sands, possibly some zinc, and other base metals, and possibly iron ore. But those would be the three primary metals that we’re looking for.

TNM: Which of those metals are the hardest to find good prospects?

Street: It’s actually quite hard as you probably know to find high-quality nickel assets, particularly sulphide nickel assets.

TNM: Are there any jurisdictions where you just won’t go?

Street:  We have never traditionally looked at Russia and the former Soviet Union, just because we’ve not really spent a lot of time there in our careers. It’s not an area of the world where we have a lot of expertise. We’re quite focused on North America, Canada the U.S. and Australia. We’ve previously made a lot of investments in Latin America and Africa. And with our head office in the U.K., we obviously look at things in Europe. We’re looking at a few things in Scandinavia currently and in the Balkan region, which I think is quite an interesting part of the world where a lot of good technical work has been done historically.

TNM: Any red flags?

Street: I think we’re quite selective across the board. If we’re looking for a copper asset, for example, typically it’s got to have good grades, in a good jurisdiction, and in terms of permitting we need to get comfortable with the timetable around it. We’re looking for high-quality assets. We’re quite focused on assets with relatively low capital intensity — ideally US$300-$400 million or lower. And mine lives of at least eight or ten years. We like assets that smaller companies can potentially build or start off at a smaller scale and then expand later. It’s difficult for a small company or a junior to put a project into production that has a US$1 billion capex bill. How can they raise the money for that? So we’re quite focused on low-capital intensity, ideally high-grade, quicker payback projects but projects that can scale up to be relatively sizeable resources.

On the gold side, we like to target assets that we think can produce about 100,000 ounces of gold a year from a critical mass point of view. And then we’re looking for the best management teams we can partner with, really, in terms of having the right skill sets, having a track record of having done things before. I think David Strang of Ero Copper is a good example of that. 

TNM: All-in sustaining costs of below US$1,000 per ounce gold?

Street: Yes. We’re looking for assets that are in the bottom half of the cost curve.

TNM: How long does Tembo stay invested on average?

Street: Our average investment time frame is four to six years, which is probably quite lengthy compared to a lot of the other funds these days.

TNM: Have you ever been in a situation where you love the asset, but aren’t crazy about the management team? Would you still invest?

Street: That’s a good question. I think we probably would. If we really loved the assets we’d probably have some dialogue with the team about whether some other people could be introduced into the team. We’re not looking to run companies. We’re a financial investor, but we want to be backing, as a strategic investor, a team that has the same vision for the asset as we do; that shares the same vision about how it should be developed. Sometimes you’ll find some companies that are very keen to try and get into production with a very small scale asset, whereas we’re of the view that we’d rather do more development work on understanding the geology, trying to increase the resource base before doing that, for example. So we need to be aligned with management from the outset. We usually will have someone on the board of these companies — not always, but usually.

TNM: There has been a lot of M&A recently. Do you expect to see more of it?

Street: Yes I do see more of it; I think some of the bigger players will struggle to fill their pipelines and find new assets over the next three to five years, particularly if the markets continue to strengthen. And I think they will be looking to add assets through M&A. And in lots of cases, it does make sense to buy assets rather than develop them from an early stage for some of the bigger companies. The Newcrest deal with Pretium is a good example of that. So I think it’s something we’ll see more of because there is a scarcity of good assets in the industry. We’ve had such a long period, where capital was scarce; and there weren’t many good development projects advanced, especially in copper and nickel. So I definitely think we’re going to see more M&A over the next three to four years.

TNM: As a Canadian I have to ask you whether you’re close to investing in anything else here?

Street: In Canada we’ve invested more recently in Marimaca and in Arizona Sonoran Copper. They are really good examples of the types of things we like because they’re strong projects and you can put them into production without a lot of capital expenditure. We’re looking at a few other gold assets in Canada now but I wouldn’t say we’re close just yet.