Development and Discovery = Capital return for investors, NOT a dividend yield!

Development and Discovery = Capital return for investors, NOT a dividend yield!

23 November 2021

D + D = $

The mining industry and those ‘loyal’ investors are still licking their wounds from the last Super Cycle. From 2003 to 2013 the China led urbanization and industrialization created massive materials intensive demand. During this time China joined the World Trade Organization as a $1tn economy and since then continued to grow to over a $15tn economy.   

The mining industry was initially slow to respond, but was soon encouraged to pursue growth over margin by investors who were only too happy to supply finance. Coupled with poor capital discipline, the industry soon found itself with bloated balance sheets and project development pipelines it could not and should not have engaged with. Over that 10 year period the industry’s fixed asset base expanded seven times! It took the next 9 years for the industry to repair itself.  

Since the March 2020 pandemic lows in the global financial markets, the post-lockdown demand recovery and a global restocking of material intensive industries, has led to a spike in commodity prices. This rebound, coupled with the metal demand for the evolving clean energy transition and global infrastructure, has led to speculation we are entering another Super Cycle. 

Figure 1: The health of the mining industry ($Bn) 

Source: Liberum Capital, 145 equities analysed

However, although the mining industry is experiencing very high free cash flow yields and return on invested capital, many of the mining companies are reluctant to deploy more development capital or increase exploration expenditure. The pressure from shareholders to receive a dividend has only intensified, largely driven by their short term view on yield. The mining industry is NOT a short term investment. Investors should now be demanding production and development growth NOT dividend yield, as our industry is entering a phase of ex growth, declining reserve life and lower mineral grades.  

Mark Bristow (CEO, Barrick Gold) commented to Mining Weekly, recently  “This industry is a partnership between capital, labour and governments and our responsibility as the managers of businesses is to shepherd and brace that partnership to ensure that it’s optimal, and that it doesn’t exploit but does deliver value to the stakeholders - all of them” 

Figure 1 highlights the recent trend to return capital to shareholders, instead of deploying additional capital to project development and/or exploration. In our view paying a dividend might ensure a culture of capital discipline in the company, but it is not the most efficient use of capital. 

  • D + D =  $  Development & Discovery = Capital return for investors, NOT a dividend yield! 

At Amati Global Investors our Strategic Metals Fund (ASMF) is positioned to take advantage of capital growth in the small and mid-cap mining sectors principally driven by asset development and exploration discovery.  Our investment process has already highlighted which companies, orebodies and exploration ground are the most prospective. We then require management to execute on plan and deploy capital into the ground, not pay us a dividend. 


Recent analysis by S&P Global Market Intelligence predicts the global nonferrous exploration expenditure to rise around 15% year on year next year, but this is still far off from the peak of 2012, when the global mining industry crested the Chinese super cycle wave. 

Figure 2: Global Nonferrous exploration expenditure ($Bn)

The Exploration Price Index is calculated using forecasted metal price changes and indexed to previous year's exploration expenditure
Source: S&P Global Market Intelligence

We have written at length in our Newsletters and Factsheets that the energy transition starts and ends with strategic metals.  Expanding primary metal supply will require massive capital investment, even with maximizing secondary supply, through scrap recycling. However, when you analyze the global exploration expenditure by commodity, Figure 3, the largest beneficiary has been gold, not green metals.  This plays straight to the strengths (technical and financial) of the ASMF, where we are willing to invest in (fund) prospective exploration and development companies, and not sit back and count our dividends.

Figure 3: Global Exploration expenditure ($M) by metal

Source: S&P Global Market Intelligence

The mining industry could be on the cusp of entering a new up cycle, however this is only sustainable if the industry is efficiently capitalized and allowed to explore ‘beyond the mine gate’.  Figure 4 highlights the decline in capital being spent on generative grassroots exploration.  

Figure 4: Greenfield exploration needs a boost  

Source: S&P Global Market Intelligence


The term ‘Super Cycle’, as defined by Alan Heap (Citigroup) in relation to commodity markets, was a ‘prolonged (decades-long) trend rise in real commodity prices.  We are not in a current super cycle, but the ingredients are coming together to make one. However, for the cycle to be sustainable we need further investment.   In the short term the supply-demand picture for the base metals and specialty metals is well matched, however if you project the committed mine production against primary metal demand an emerging deficit presents itself in the medium term.  Either the global climate ambitions will have to be tapered, or we will have to adjust to an inflationary commodity environment under a sustainable development scenario (wrt climate change). 


The ASMF invests in companies who can grow the value of their business through de-risking a development asset and/or add value through exploration. This approach ensures we are less reliant on the commodity price floating ‘all corporate boats’, however we still benefit from the beta effect of rising metal prices too. 


A recent survey by McKinsey & Company analysed 40 recent mining projects world-wide. Only 20% of those projects surveyed were completed within parameters predicted during feasibility study. The overriding issue was weakness in project discipline at the feasibility study stage, leading to cost and completion overrun.  McKinsey estimated this overrun to cost the industry over $100bn, in new project development.  


This survey highlights the need for a technical and financial background in screening these mining companies, whereby investing in a de-risking project which delivers on time and on budget can make the investor good returns. 


Figure 5: Analysis of project completion


Source: McKinsey & Company


This article is a financial promotion issued by Amati Global Investors Limited, which is authorised and regulated by the Financial Conduct Authority. It is provided for informational purposes only and does not represent an offer or solicitation to buy or sell any securities, and nor does it provide you with all the facts that you need to make an informed decision about the merits or otherwise of this Fund. Please refer to the risk warning below.  


Risk Warning  



Past performance is not a reliable guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amount they originally invested. The investments associated with this fund are concentrated in natural resources companies, which are subject to greater risk and volatility than companies held in other funds with investments across a range of industries and sectors. The return on investments in overseas markets may increase or decrease as a result of exchange rate movements. Shares in some of the underlying companies associated with the fund may be difficult to sell in a timely manner and at a reasonable price. In extreme circumstances this may affect the ability of the fund to meet redemption requests on demand.


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