For centuries, London has been a Mecca for mining engineers on the make. During the heyday of the British Empire, the story goes that any prospector could raise a small fortune in the Square Mile and, arming themselves with little more than a map and a big drill, set sail for some far flung corner of the globe in search of coal, copper or gold. More often than not, they would return red-faced and empty-handed.
Fast forward to 2014 and London remains the natural home of large, established metals producers, while the London Stock Exchange’s alternative investment market continues to attract many development stage companies and those emerging from the exploration focused markets overseas.
There’s even a little of mining’s cavalier spirit still in evidence in the City, albeit tempered by caution as firms, particularly junior firms, struggle with spiralling operating costs, key commodities such as iron ore and coal threaten to tip into over-supply and new mineral deposits become increasingly elusive.
"London has been, and continues to be, a global centre for mining finance, there’s no question about that," says Tim Biggs, UK head of mining for Deloitte. "Toronto may be a rival hub for mining listings, but in market capitalisation terms London is much larger because it is home to the big boys.
"Four of the world’s five biggest diversified mining houses – BHP, Rio Tinto, Glencore and Anglo American – have their primary stock listings here. The only one that that hasn’t is Vale, which is listed in Brazil and New York.
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"Take Rio Tinto and BHP, originally known as the Broken Hill Proprietary Company. Historically, these companies operated in various parts of what used to be the British Empire such as Australia, Canada and South Africa, but they still raised their funding in London. In a funny way not a lot has changed."
London calling: why mining giants continue to flock to the UK capital
During a period of uncertainty for the global mining sector – one characterised by competition from US coal exporters, a global investment community that is increasingly risk-averse and uncertainty around taxation, legislation and resource nationalism – London represents a relatively safe haven.
"The conditions exist within London for it to continue to be the centre for mining floats and finance, because it has all the essential ingredients," Biggs explains. "Firstly, as an established financial centre the UK capital continues to attract funds, meaning there is adequate liquidity – so if you suddenly decide that you need to sell 10% of your shares, then there is a market for them.
"Secondly, the London Stock Exchange (LSE) and the City of London are highly regarded, with strict and solid listings regulations, so it is a very reliable environment in which to raise capital. The rule of law is strong here and if you put your money into a mining house in London you can be confident that someone isn’t going to come along and nationalise it from under you.
"Thirdly, London is politically stable, making it an increasingly attractive proposition for companies from Eastern Europe and the Commonwealth of Independent States (CIS), many of which are now listed on the LSE. If you are an oligarch, then invest in London because you can be comfortable that there is a framework in place that means that nothing untoward is going to happen to your money.
"There’s also a lot of South African firms based here – Anglo American was listed in Johannesburg before it came to London – and increasing numbers of African and South American mining houses. Fresnillo, the world’s biggest silver miner, is entirely Mexican, but is listed in London. Antofagasta, a major copper miner, is a largely Chilean company, but again its stock listing is here."
In addition to this marked change in London’s corporate mining demographic, the city also offers both nascent and mature mining operators advanced infrastructure and a wealth of intellectual capital, invaluable commodities under current market conditions, as Biggs explains.
"London is home to a lot of people – everyone from geologists and engineers to bankers, brokers, accountants and lawyers – who know a great deal about listing and floating mining companies – people like Deloitte," he tells me from the company’s London headquarters near Holborn. "But the key thing is that London is a market where there is capital that is willing to be invested in mining."
Junior high: dedicated mining funds and early-stage investment
The fact that there are still institutional and private investors in London with a significant appetite for risk hints that mining’s negative image among certain fund managers may finally be on the wane.
"There were a lot of funds, for example pension funds, that were very averse to investing in mining because they saw it as too speculative," confirms Biggs. "I think that is changing, but only at the big end. The BHPs of the world are seen as blue chip stock, but for junior explorers and developers it is still speculative, so I don’t think you’re going to find big pension funds investing in mining stocks."
However, Biggs identifies the emergence of dedicated mining funds such as X2 Resources – former Xstrata boss Mick Davis’s new private venture, which, according to its announcement in June, is seeking $1.5bn in additional investment – as a positive trend. He also believes that, armed with a robust business plan and proven field assets, early-stage operators can secure significant financial backing in London.
"My opinion is that if you are a mining company with a good asset – and by that I mean one that can be stress-tested to ensure that there really is metal under the ground – then that company will be able to raise money," he says. "For example, if a copper miner can demonstrate that they have a resilient business plan and can make money at the current price – minus say 20% and despite movements in the exchange rate – then I believe that they will be allowed to list in London.
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"Commodity prices are mixed right now. Iron ore has dropped off significantly, and that obviously affects different companies in different ways. Majors such as BHP or Rio Tinto produce iron ore in Western Australia at a relatively low cash cost and therefore have a lot of head room between those costs and prices, whereas junior firms with less mature mines are more exposed and may struggle.
"Interestingly gold has been quite stable and has sat around the same price for the last six months," Biggs continues. "It came off an historic high around 18 months ago and dropped spectacularly from $1,800 an ounce to around $1,300. If you are producing at below $1,300 you’re okay, but if you got excited a few years ago and started producing at a higher cost, then you’ve probably got a problem."
Global rivals: London faces competition from Toronto and Hong Kong
With foreign investment capital continuing to flood into London, can the city cement its status as the world’s premier mining finance centre in the face of stiff competition from the likes of Toronto, Australian cities including Perth, and emerging hubs such as Shanghai and Hong Kong?
"What is interesting and distinctive about London mining houses is that they might be listed and have a head office here, but their mines are located all over the world," says Biggs. "Operators such as Rio Tinto and Anglo American have corporate offices in London because they are listed and/or raising funds here, whereas other companies have an office in the city, and yet their corporate headquarters are wherever their operations are – be that Russia, South America or South Africa.
"New York is home to some well-known US mining houses, but, interestingly, it is not a huge centre for mining," he continues. "South American operators tend to be dual listed; for instance, Vale is listed on the Brazilian Stock Exchange and also in New York.
"The rivals to London, then, are Toronto, cities in Australia such as Perth, Melbourne and Brisbane, and the one that is up and coming is Hong Kong. A lot of Chinese mining groups will set up shop in Hong Kong and also in Shanghai. They are acquisitive, they are growing and they cannot be ignored."
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