by Henry Bonner, Sprott Global Resource Investments.
Rick Rule, Chairman of Sprott Global Resource Investments Ltd., says some of the ‘big money’ that was circling the resource sector has finally found a home. Rick Rule recently commented on a couple of new investment mandates that he believes signal a positive development in the resource sector.
The first mandate is a deal for Sprott Asset Management to co-manage upwards of $110 million in funds along with Zijin Mining Group Company Limited, the largest publicly traded non-ferrous metals mining company in China. $100 million of those funds come from Zijin while $10 million is to come from Sprott Inc., Sprott Asset Management’s parent company. 1
Sprott CEO Peter Grosskopf said: “We believe the combination of Zijin’s technical strengths and Sprott’s resource investment expertise will prove to be an attractive option for investors looking to invest in the mining sector with a focus on gold.”
In another development, Sprott Inc. announced in December, 2013, that it had been awarded a mandate to co-manage a $375 million private equity fund by South Korea’s National Pension Service with a matching $375 million commitment from the state-owned Korean Electrical Power Company (“KEPCO”), the largest electric utility in Korea.
Mr. Grosskopf said, “This mandate marks Sprott’s second entry into the growing Asian marketplace and solidifies our international reputation for expertise in natural resource investing.” He added, “We are committed to continuing to build our institutional client base as we seek undervalued opportunities in the sector.”
Sprott expects the closing of the second mandate to be completed in the first quarter of 2014.
Rick suggests these new partners give credence to the argument that the sector is undervalued. Many large state-controlled funds are using the weakness in the natural resource market to set themselves up for future returns, but also to make strategic investments beyond the scope of merely generating a profit on investments.
Rick explained why he views this as an important development for the sector:
What is interesting about both of these mandates is that they represent new capital to the sector.
Our Korean partners in particular are Asian sovereign or semi-sovereign investors looking to make the types of strategic investments that North American and European countries looked to make in the 1950’s and 1960’s – to secure their country’s access to natural resources and to develop the financial infrastructure in their capital markets that will allow them to play the game in natural resource businesses.
Natural resource investing that participates in financing the juniors has typically originated from small hedge funds or open-ended mutual funds, but these are often generalist, short term investors relative to the natural resources cycle.
Our new partners are long-term investors with the intention to stay in the natural resources business.[…]These new type of investors are more focused and long-term participants with financial and strategic objectives, with the design of providing the raw materials for the development of their respective countries.
That these private equity pools of capital are choosing to deploy capital in the natural resource sector now is an “extremely bullish” sign for the sector, says Rick, though Sprott is unlikely to rush into the sector in order to deploy this capital immediately. In fact, it will structure the deals in a way that makes sense for these funds. Nonetheless, in the event of a recovery, Rick believes that participation from these Asian partners will help strengthen the sector and allow Sprott and its partners to invest rationally in both bull and bear markets.
There may also be more of these types of investors to come, says Rick: “From talking to sovereign investors in my network, it appears big money is circling the physical sector as well. The money has not yet ‘landed,’ but it is important to know what might happen to those markets if the ‘big money’ begins to settle. We believe it would not take much demand for physical delivery on the futures exchanges to create a very unsettling experience for the large institutions that are short the trade.”
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