HardAssetsInvestor

Written by Tom Vulcan  |

June 29, 2011

Bhappu: Some Metals Flying Under The Radar

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As undervalued metals become harder to find, minor metals and strategic minerals offer opportunity.

HardAssetsInvestor.com’s minor metals reporter Tom Vulcan recently had the chance to chat with Ross Bhappu, partner with Resource Capital Funds, the Denver-based mining-focused private equity firm. Bhappu sees several opportunities in minor metals like tungsten.

Tom Vulcan (Vulcan): Can you start by telling us a little about Resource Capital Funds?

Ross Bhappu (Bhappu): Resource Capital Funds is a private equity fund that invests exclusively in the mining and minerals industry. The original premise behind Resource Capital Funds was to fund development stage mining companies through their post-exploration feasibility study periods where, before, there had been a gap in available funding.

Our first fund, of some $41 million, was created in 1998. Since then, we’ve created four other funds totaling around $1.9 billion, with our latest fund, created in 2009, being around $1.2 billion.

Vulcan: Where do you see opportunities in hard mineral commodities mining in the coming several years—both countries and different commodities?

Bhappu: It’s a very good question. It’s something we wrestle with internally here all the time. Are there commodities that are under the radar screen right now?

Precious metals and base metals are really in the news in a very big way. There’s been a tremendous amount of money flowing into those areas. We’re struggling to find good value in gold projects, for example, and in copper projects. With gold at $1,500 an ounce and copper at over $4 per pound, it’s difficult to find good, undervalued assets at these levels.

We are finding interesting opportunities in a couple of areas. One is in coal, where we have seen a number of interesting regional opportunities. Our real interest is in metallurgical coal. This is a hard product to find, because not all metallurgical coal is created equal.

In industrial minerals, we continue to see a number of attractive opportunities. But within them, our biggest concern is marketing—the ability to bring these projects to market and gain market share. But we have made some very interesting investments recently: one in refractory bauxite and another one in potash.

Our other real focus right now is the minor metals/strategic minerals, like tantalum, lithium and rare earths. We’ve also made an investment recently in tungsten. We’re seeing some interesting opportunities across that spectrum. Some of these minor metals and strategic minerals are not well known at all and their applications are not well known. But they are very important.

Some interesting recent investments have included commodities that were specifically Chinese dominated in terms of supply, where the Chinese, as in rare earths, have said: “We’re not going to export these commodities anymore. We’re going to use them for internal consumption,” or, “We’re going to export the finished product.” Tungsten’s a good case in point. The Chinese dominated tungsten exports, but now they have really curtailed and cut the level of exports.

Vulcan: And geographically?

Bhappu: We really don’t have any particular area of interest geographically. We focus on good opportunities.

Geopolitical risk has really evolved and changed over the last few years. When I first started with Resource Capital Funds, Colombia was completely off limits. If we got a project in Colombia, we would just automatically say: “No way! We’re not going there.” That was really more because of personal safety and personal risk than political risk. They were a huge issue for us. But that has evolved, and now we are looking at some wonderful opportunities in Colombia.

The flip side to that is a place like Ecuador. Ecuador had some fantastic investment opportunities, but there the uncertainty over foreign investment in mining has really made it very difficult. So we’re standing on the sidelines when it comes to Ecuador.

One of the things we do that is unique to us is that, when we look at a new country where we haven’t been before, we’ll typically send a team in for an extended period to analyze the political risk, the climate and whether the country makes sense for us.