Mario Gutiérrez
Managing Partner
Javier Gutiérrez
Managing Director
Tauro Capital Partners
View from the Top

Exploiting the Vacuum in Early Stage Exploration

Wed, 10/18/2017 - 15:31

Q: What was the strategic thinking behind the creation of Tauro Capital Partners in 2013?

JG: Tauro Capital Partners operates in a selective niche segment of the industry, which is funding early stage private exploration opportunities. We believe there are important mining projects waiting to be developed. After the financial crisis of 2008, the industry went through a period of transition and in Mexico, we saw a significant retreat of capital raised through the TSX and the TSX.V for exploration-stage mining projects. Large mining funds that owned several concessions were forced to selectively streamline their portfolio, while many juniors went out of business altogether. This highly volatile environment created a vacuum of early stage exploration projects that are now being exploited by dedicated, specialized funds like Tauro Capital Partners.

Q: What have been the highlights since the company’s inception?

MG: We have made a significant investment in a potentially substantial exploration-stage base metal project in Mexico. It is too early to release more information but we are very excited about its prospects and there should be more information available by 2018. It is important to remember that in this business, for every 10 projects, only one will probably yield a significant risk adjusted return so we must be selective. Before we commit capital, we are careful to complete all the technical due diligence requirements, which typically includes geochemistry, induced polarization and target core drilling. In addition to early stage exploration projects, we also operate a growing mining services division. We have a large crushing and conveying operation in Coahuila.

When we decided to set up a business focused on allocating private capital into early-stage exploration, we  knew we were entering at the highest risk-reward stage of the industry. When investing in early stage exploration, projects are not based or analyzed on a per-period cash-flow generation basis and so the business model is different from most private equity investments. We use private capital to build a portfolio of diversified proven and probable reserves with a view to monetizing them at some point down the road. Our expertise lies in sourcing and funding exploration projects with high potential and an acceptable risk profile. We know that not every investment will be a success – that is the nature of the segment we are in – but one profitable project that defines strong mineral reserves has the potential to deliver fantastic value to shareholders by itself.

Q: To what extent have you seen the M&A market in the mining sector recovering alongside the commodity prices?

MG: The mining industry overall is undergoing an inflection point. The sector only accounts for around 2 percent of total corporate M&A activity, which is minimal considering the size of the global mining industry, and this is because current conditions are not ideal for deals.

Typically, there are two main reasons for M&A activity in the mining sector. There are strategic divestitures prompted by a need for liquidity to reduce balance-sheet leverage or to rebalance portfolio exposure. Otherwise, a company might simply receive an offer above perceived fair value of the asset. Either way, deals tend to get done when either the sector is reaching the top of a cycle or during a down cycle consolidation play. There is not a great deal of M&A activity now and that suggests investors want to keep their projects because they are bullish on prices. From a valuation perspective, cash flow and reserves per ton typically doubles between mid-to-peak cycle but timing it right, as always, is the key. As a rule, M&A activity should pick up as metals supply scarcity perception increases, which tends to increase prices. In addition, declining ore grades, environmental factors and labor conflicts going on in jurisdictions around the world are becoming supply constraints that will continue to support an upward price trend. This could lead to more deals.

Q: To what extent does the regulatory environment in Mexico facilitate M&A deals in the mining sector?
MG: Overall, the regulatory framework is very accommodating to investors. The recent increase in a specific mining cash flow targeted tax became a temporary investment restrain but I do not believe it will be a long- term overhang. It is important to take these changes in the context of what Mexico is currently going through as a country. Mexico only collects around 13-15 percent of GDP in taxes, which is well below the global average. The Energy Reform will be good for Mexico in the long run but with declining oil production and prices it has meant that the government is receiving around US$40-50 billion less in revenue per year. The mining sector was one of the targeted sectors within a broader tax diversification strategy implemented by the current administration.

On the positive side, additional spending by the government on infrastructure will continue to benefit the Mexican people, the economy and the mining sector as a supplier of metals, services and jobs.

Q: Do you think the Mexican Stock Exchange (BMV) should do more to help junior explorers operating in Mexico?

MG: Of course I would rather see capital raised for Mexican exploration by Mexican companies in Mexican pesos than to see the transactions taking place in Toronto. Currently, Canadian markets offer conditions that are not available in

Mexico. Canada has always had a very pro-mining financial community, and its investors know and welcome the risk involved in mining ventures. In Mexico, exploration is controlled by the large companies with scalable budgets and mostly they reap the rewards.

But Mexico is a huge jurisdiction and even the big three Mexican mining companies cannot cover all the opportunities by themselves, which is why there has been such a strong influx of Canadian companies into the market in the past 10 years. In my opinion, the Mexican institutional and retail investor community deserves to have exposure to local mining projects. The Mexican government has already done a good job in providing a working regulatory framework to promote and develop mining projects. Providing an efficient public capital raising framework seems like the logical next step.

Q: What are the main goals for the company in the next two to three years?

JG: We want to continue developing a diversified portfolio of proven and probable reserves in gold, copper and other polymetallic ventures. We are also very interested in expanding our mining services division where we have over 35 years of experience. We want to represent a viable alternative to outsource crushing and conveying needs, which will enable mining companies to focus their capital on exploration and metal reserves discovery and growth.