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Active management strategy aimed at outperforming commodity volatility

Appian Capital, a private equity firm focused on the mining sector, is looking to exit a number of investments as it starts preparations for a potential third fund later this year, founder and CEO Michael Scherb told Mergermarket.

The London-headquartered sponsor is looking to have exited seven or eight investments from its first fund and likely three from fund two before launching its new investment vehicle in 4Q21, he said.

Scherb declined to comment on which portfolio companies are for sale but noted that there is a large number of existing investments that are going through an exit process.

Appian, which was founded in 2012, has made nine “large investments” across its portfolio since then, Scherb said.

The new fund will likely be deployed across six to eight deals, each with a USD 100m to USD 300m investment, in line with the previous funds, he said.

The sponsor is yet to decide on the new vehicle’s size, he said, adding that the final number will be determined by what it knows it can deploy and what the team is able to deliver on.

Appian raised USD 375m for its first fund and USD 775m for the second, with both being significantly over-subscribed, he said. There has also been a large co-investment contribution from LPs who wanted to get more exposure directly to assets, he said.

Companies in its portfolio include nickel-copper-cobalt miner Atlantic Nickel and copper-gold miner Mineração Vale Verde, both located in Brazil; Harte Gold in Canada; rare-earth miner Peak Resources in Tanzania; and zircon-rutile-ilmenite miner Kalbar Operations in Australia, according to its website.

Among realized investments are the sale of its interest in Avanco Minerals, acquired by Oz Minerals [ASX:OZL] for AUD 418m (c. EUR 270m) in 2018; its shareholding in Roxgold, sold to Fortuna [TSE:FVI] in a share deal valued at CAD 1.1bn (EUR 750m) in April this year; and the staggered sell down of its stake in Red Eagle Mining.

Appian works actively with the leading investment banks in the mining industry around both investing and divesting, Scherb said.

Exit strategies

Appian has exited 50% of fund one to date, Scherb said. It has a typical holding period of three-to-five years but this could be longer if the dividend yield is attractive.

It is targeting 2.5x-4.0x return for investors, an IRR in the mid-twenty percent, he said.

Appian uses its skillset to acquire development assets and bring them into production. As a result, typical acquirers for its portfolio companies are mining players looking to buy de-risked assets to grow or replenish their portfolios, he said.

The mining sector is unique as a finite life business in that every year of production by a listed mining company needs to be replaced by adding more resources, otherwise, that company will trade on a lower valuation, Scherb said. As a result, M&A is a constant in the mining sector, particularly as exploration is pro-cyclical and is down 60% p.a. since the 2012 peak, he said.

If an investment has not been exited by the end of the fund’s life, Appian will go back to LPs and ask if they wish to hold the investment in a single asset vehicle and take dividends out for the life of the mine, he said. But most of its investments are exited within the life of the fund, he added.

Appian has been receiving enquiries from investors about a separate strategy for longer term credit funds, as they seek long term cash yields in a low interest rate environment. “We would target downside protected exposure and the investors would still benefit from the superior Appian sourcing, screening and oversight,” Scherb said.

Outperforming commodity trackers

Appian aims to use its operational expertise to target new investments and beat commodity price beta volatility, Scherb said. According to him, the firm is unique as a private equity sponsor that can bring in technical expertise rather than outsourcing technical aspects.

Many investors are aiming for beta performance – the value accretion from the underlying commodity price journey – but Appian strips this out and focuses on the investment’s alpha performance through active management, he said.

Its team performs all the necessary technical work on a mining asset from scratch and will redo the project modelling to create a differentiated perspective, he said. It has a selective approach, having looked at 1,200 mining projects for its first fund before investing in eight, he said.

Sources of projects include bankruptcy restructurings and asset-level earn-ins with partners who have originated the project. It also buys out projects from mining companies or explorers who need technical, financial skill and capital, Scherb said.

Appian’s investment sweet spot is in projects that are at pre-feasibility study stage, usually a couple of years before production, rather than very early-stage exploration, Scherb said. It then takes a hands-on approach with an active management team, progressing the project through permitting, financing and into production.

It does not underwrite an investment unless it sees a path to production, he said. This provides optionality on exit, as the sponsor could seek to achieve a return through dividend rather than just through an IPO or trade sale, he said.

The large part of equity capital spend comes at the back end of projects, so that final large piece of construction equity is the most de-risked piece, he said.

General and administrative expenses, management team, drilling costs and other costs are usually shared alongside large equity partners and financed split equity-to-debt 50/50, he said.

The large part of equity capital spend comes at the back end of projects, so that final large piece of construction equity is the most de-risked piece, he said.

Appian’s portfolio companies are spread across higher risk platforms in Latin America and lower risk projects in North American and continental Europe.

The sponsor looks to see through the price cycles associated with different commodities, he said, and works with co-investors that have a similar outlook.

Energy transition and ESG credentials

Appian went big on the energy transition commodity theme six years ago, providing investors strong exposure to commodities where there was a supply/demand skew, Scherb said.

In terms of commodities in which it invests, fund one targeted 70% energy transition commodities – such as copper and rare earths – hedged with 30% gold, he said.

So far, half of fund two investments are in energy transition commodities, and it would like to make two more in the energy transition space, he said. Again, this is balanced with mineral sands, gold and silver, he said.

ESG is no longer a “box-ticking exercise” but a core part of the industry thinking, he said. It is not just about the commodities that are targeted but also about operating to high standards as a tier one miner, he said.

LPs are beginning to understand that mining is part of the solution rather than part of the problem, he said, and that they can have a real positive impact in parts of the world, through the construction of operations where the job multiplier is 3x-5x per direct job created.

Appian oversees around 5,000 personnel at the portfolio company level, he said. The sponsor’s Charitable Foundation initiatives have indirectly led to the job creation for around 11,000 people around its operations, he added.


This article appeared in Mergermarket on 6 July 2021.

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