Local fund managers' reactions to the US$110-million BlackRock World Mining Trust-London Mining royalty deal have ranged from cautious admiration to comments that the deal was more the province of private equity than one for fund managers.
Pengana Capital Global Resources Fund fund manager Tim Schroeders said that, notwithstanding the project-specific risks surrounding the deal, it was "a pleasing innovation during a week when PIMCO's Bill Gross proclaimed 'the cult of equity is dying'. Innovative solutions to changing capital market circumstances will be required by both corporations and investors as we embrace the new paradigm."
Barwon Investment partner Sam Armstrong agreed the market was responding to the lack of bank funding, adding that this type of funding existed in the life sciences/biotech space.
Paul Capital had raised a series of funds investing in royalty streams from drugs and medical devices, and private equity managers, such as RCF, Sentient and Macquarie, were doing it in the resources space also.
However, private equity Partners Group senior vice president Martin Scott said the company tended "to steer clear of resource/development-related activity and instead invest in the assets surrounding it".
Schroeders said the deal was an innovative win-win that allowed both parties to achieve outcomes they desired in a non-conventional way.
"Mining royalties are not new and state governments in Australia have been the beneficiaries of royalties for some time," he said.
"From a government perspective the royalty represents a payment to the owners of the resource for the right to sell, use or dispose of the resource."
In announcing the deal last week, BlackRock World Mining Trust chair Anthony Lea said the investment was an "attractive addition to the investment portfolio" for a number of reasons.
The investment was expected to be "immediately income enhancing" and the royalties gave "direct long-term commodity price exposure to iron ore whilst avoiding mining sector cost inflation", Lea said.
The target production for London Mining's Marampa was 5 million tons per annum (Mtpa), and BlackRock's investment in the royalty would give London Mining further financial resources to expand Marampa to 9Mtpa.
Lea said investment in mining royalties had been under review for some time.
"This deal meets our investment objective of trying to raise income for the portfolio, whilst at the same time also being exposed to growth in production and to changes in commodity prices," he said.
BlackRock World Mining Trust acquired for US$110 million - payable in cash on completion - a 2 per cent revenue-related royalty from iron ore sales over the life of London Mining's Marampa mine ML09/02 in Sierra Leone.
Schroeders said corporations had been beneficiaries of royalties for some time. In Australia, Iluka Resources had a "highly lucrative" royalty over iron production from certain tenements in BHP Billiton's Mining Area C province in Western Australia.
He said there were benefits to the royalty arrangement between London Mining and BlackRock World Mining Trust.
"The deal 'ring fences' the exposure of BlackRock World Mining Trust to project cost blow-outs, escalation in operating costs, whilst maintaining exposure to growth in reserves, iron ore prices and production growth. The structure disaggregates risks and returns relative to a plain equity investment," he said.
"In addition, the unlisted nature of the investment avoids day-to-day mark-to-market volatility. From London Mining's perspective, the company has a very public approval of its Marampa Mine's bona fides with BlackRock's commitment. In addition, the ability to secure alternative forms of capital will be enhanced given the US$110 million injection, whilst not being perceived to be beholden to one substantial institutional equity investor."
