Mining investments are expected to strengthen as some investors find buying opportunities amid recession fears, aiming to capitalize on high profits resulting from predicted supply shortfalls and high demand for industrial metals in particular.

Equity markets have softened in 2022. However, while global metals and mining financings hit a record monthly low in May, the S&P GSCI Industrial Metals and S&P GSCI Precious Metals indexes have outperformed the S&P 500, Dow Jones and Nasdaq, which have been hammered this year by three major U.S. Federal Reserve rate hikes.

Both metals indexes surged following the Russian invasion of Ukraine as nickel, copper, aluminum and tin prices all reached record highs due to supply chain fears. Investors see this month's market rout as creating buying opportunities amid increasingly concerning supply issues for industrial metals.

"I can assure you, the market is strong in terms of corporate activity, because at the end of the day it comes back to supply and demand," Nicholas Boyd-Mathews, chief investment officer for Eden Asset Management Pty. Ltd., told S&P Global Commodity Insights. "If there isn't enough supply of commodities to meet demand, then projects are going to be funded, whether it's through an equity raise at a discount to the market price, or through debt funding at a higher cost on interest rates."

"Either way they're going to want to raise that money, because the upside potential of getting to first production offers a far greater return than the cost of borrowing or issuing equity," Boyd-Mathews added.

Tapping into that potential, however, requires patience.

"I'd love to have invested in a lithium project in the last 12 months, but valuations have gone a bit crazy," Richard Crookes, managing partner with private equity firm Lionhead Resources, told Commodity Insights. "With a patient view, if the markets come off, it actually creates more of an opportunity for me than in a hot market. When the retail money dries up, it's a better environment for a long-term fund like ours."

"I am, at my heart, a capital provider. And to the extent that I'm not having to compete with the dumb money that's been in the market for the last three years, that's a good thing for me," veteran mining sector investor Rick Rule, former president and CEO of Sprott U.S. Holdings Inc., told Commodity Insights. "High-quality junior issuers are being buffeted by the market decline at the same time that the flotsam and jetsam is being kicked out."

Window of opportunity

The window to more cheaply priced private placements with more favorable terms over warrants, for example, may be cracking open.

"I've been basically frozen out of the private placement market for three years because, with some exceptions, I didn't see pricing where, from my viewpoint, the rewards were adequate to compensate me for the risk," Rule said. "And that's changing very rapidly."

Crookes is confident that Lionhead will secure the $450 million it is seeking for its Lionhead Resources Fund I LP by the end of 2022, given the "huge pools of capital" available in generalist endowment funds, institutional family offices, pension funds and others looking for a specialist mining fund to deploy capital on their behalf.

Increasing European interest

While support for such specialist funds traditionally comes from the U.S., Lionhead has observed a renewed interest in its critical minerals focus from European multifamily offices and pension funds. These types of investors understand the energy transition and see the continent's various critical mineral initiatives as a way to "ensure Europe can supply itself with its own source of critical minerals and not rely on China solely" for critical raw materials, Crookes said.

Keith Coughlan, executive chairman of European Metals Holdings Ltd., is confident the company can raise the funds needed for its stake in the $643.8 million Cinovec project. Cinovec is a low-carbon lithium operation set to be sanctioned in the first half of 2023 with project operator CEZ Group, a state-owned Czech utility.

"Maybe it's been a long-overdue shakeout," Coughlan said of global markets' reaction to recession fears, "but every time things settle back, good projects and good companies stabilize and come up, and the ones who were trading on fresh air don't. It will be a more selective market going forward, but I'm comfortable because the thematic for batteries and [electric vehicles] is not going away, whatever happens."

"All the non-equity contribution we'd be doing at a project level, which will include things like grant assistance or soft debt from the EU, be it through something like the European Investment Bank or export credit finance," Coughlan told Commodity Insights.

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