Peter Hadekel: Caisse de dépôt provides shot in the arm for mining

MONTREAL — The mining industry in Quebec has been reeling since the Parti Québécois government made the provincial royalty regime more onerous.

The government’s decision to impose royalties on both production and profits was seen by industry players as the wrong move at the wrong time, given the volatility in metal prices and the scarcity of investment capital these days.

Now, an arm of the provincial government is stepping in with more positive news. The Caisse de dépôt et placement, Quebec’s giant pension fund manager, announced Thursday that it’s injecting $250 million to invest in Quebec mining companies through a fund known as Sodémex Développement. Its mandate will include investing in all stages of mining activity.

It will purchase stakes of between $5 million and $20 million, primarily through debentures or equity.

The announcement comes at a time when many voices in the industry are complaining about a brutally tough investment climate that has made it extremely difficult to raise financing. The appetite for risk has diminished sharply.

“It might be the global economy, it might be the situation in China, it might be the decline in gold prices,” said Dany Pelletier, a senior Caisse executive who will be involved in the new fund.

For that reason, the Caisse’s timing looks good. The pension fund is likely to find some attractive opportunities because of the absence of other potential investors. The new fund is part of the Caisse’s overall commitment to invest more in the province.

Quebec mining companies can often be acquired by bigger players if they don’t have enough capital to complete exploration and development, so the new fund should help consolidate the province’s assets.

But while the mining industry welcomes the new venture, it’s still feeling the sting from the PQ’s decision to toughen mining royalties.

“One move was a negative, the other is a positive,” said an industry veteran. “The royalty thing is just ludicrous. The timing couldn’t be more off base.

“They are coming in and making things tougher at a time when mining companies are absolutely suffering.

“Today again we saw $50 off the gold price. They are really disconnected from reality because they don’t understand the difficulties and the slim margins we have in mining. They think all the mining companies are making tons of money.”

However, the executive applauded the move by the Caisse to get involved. The difficult financing conditions right now “will play into their hands. That’s when you want to act. The timing is very good, there’s no question, because there’s very limited equity available out there from traditional sources. The brokers aren’t throwing around (deals) these days.”

The Caisse said it will take several selection criteria into account when making an investment, including the experience of the management team, the quality of the mineral deposit, the company’s competitiveness, the presence of adequate infrastructure, social acceptability and sustainability.

The pension fund started a similar venture five years ago when it funded a private equity firm called MinQuest with $225 million in capital.

But MinQuest deployed less than half its capital when it was halted in its tracks by the financial crisis of 2008-09 when the Caisse lost $40 billion due to a debacle in the market for asset backed commercial paper.

The Caisse announced Thursday that it has hired Carl Gilbert, a highly regarded investment professional with a strong mining background to help run Sodémex.

The pension fund set up Sodémex in 1996 and invested about $50 million to help Quebec companies in the exploration phase. This week’s announcement aims to extend the Caisse’s reach to all stages of mining company development from exploration to production.

“The Caisse is attacking this in the right way,” said the mining executive. “Sodémex was geared toward exploration while the Caisse itself was geared to bigger ticket items — this sort of sits in the middle, where a company needs a project to be financed and developed in the $20 million range. That’s where this would help.”

phadekel@videotron.ca