Billiton’s Junior Exploration Strategy
Billiton is a London-based mining company. It’s primary listing is on the London Stock Exchange where it ranks 45 (end February 2001) on the FTSE 100 list of companies, with a market capitalisation of US$10 bn (cf Rio Tinto at 25 and US$19.5 bn respectively). Contributions to Billiton’s operating profit during the six month period ended 31/12/2000 came from (in decreasing order of magnitude of contribution): - aluminium, coal, titanium minerals, steel and ferralloys, nickel, base metals.
Billiton’s early historical roots (approx. 175 years ago) lie in tin mining on the island of Billiton (now Belitung) located between Sumatra and Kalimantan in the Indonesian Archipelago. In more recent times, the company was floated in London (1997) following the purchase (1994) by Gencor (a South African mining finance house) of the bulk of the metals assets of the Royal Dutch/Shell Group of companies.
Historically, neither Gencor nor Billiton have been at the top of the league table in terms of exploration expenditure, typically spending in the order of 1-2% of gross revenue from sales on exploration (against an industry average of 3-4%). Thus, the combination of the two companies’ programmes (with some rationalisation) produced a globally significant effort with annual budget typically in the range US$30-40M. Initially, this had a large gold component, which remained with Gencor at the time of the London float. Generally speaking the company didn’t become involved in large area generative exploration (although there were exceptions) and as a result did not accumulate large databases.
As all Geoscientists are painfully aware, the years 1998 and 1999 witnessed some dramatic cut backs in exploration expenditure by most companies, a situation exacerbated by the decline in availability of venture capital to the junior mining sector. Billiton had its exploration budget cut by approximately 50% and its exploration staff by approximately 75%. A radical rethink of exploration strategy was called for. Senior management questioned the value added from exploration. Since exploration costs come right off the bottom line, they have a leveraging effect on financial ratios (such as P/E) which in turn may distort the company’s share price and valuation. There was no longer a willingness to accept the risk / reward / time scale mix that had characterised exploration. Were there other ways to do it?
Coincidentally, at this time, Billiton was in the process of opening a Vancouver office, having taken the decision to work more closely with the junior sector and had done four "standard" joint venture agreements with Canadian juniors, which tied up a large portion of the Buchans camp in Newfoundland. With new management on board in Vancouver, a model was developed to conduct exploration via equity placements in junior companies, thereby linking Billiton even closer to the junior sector. The model closely follows that pioneered by Teck perhaps twenty years ago, and it was wholeheartedly embraced and supported by Billiton’s management.
To summarise, the relationship or alliance with the junior mining company commences with a small private placement, which in the case of a Canadian transaction may be subject to flow-through tax benefits. Typically, this results in Billiton owning 4-12% of the junior company. The placement is made via a Subscription Agreement, which describes the agreed programme and budget to which the placement funds will be applied. Attached to the Subscription Agreement is an agreed Joint Venture Agreement, which can be triggered at Billiton’s election once the placement funds have been spent. The exploration programme is staffed by the junior who in reality are spending their money during the subscription phase of the alliance.
Needless to say a crucial part of the deal making process from Billiton’s side is an extensive due diligence study on the junior. Apart from the normal corporate, financial and fiscal work, we put a lot of effort into assuring ourselves of the qualities and capabilities of the management and staff of the junior company in question.
To date in Australia six investments have been completed and approximately eight additional ones elsewhere (mostly out of Vancouver). It should be noted that one or two of these (eg. Corriente in Equador) involved a Billiton property being vended for equity. Several joint ventures have resulted. We firmly believe that in the two years Billiton has been working with juniors, more targets have been drilled and at lower cost than would have been the case with a 100% Billiton programme.
The junior sector is estimated to spend on average US$0.5bn each year on exploration and development. Over the past few years, this effort has been in considerable decline and the resource base owned by juniors is not being refreshed – venture capital is not flowing into the business and clearly a strategic reliance on juniors cannot be sustained indefinitely. The recent acquisition by Billiton of Rio Algom presents an opportunity to integrate two different exploration approaches. The Rio Algom team has a notable success to their name with the discovery of the Spence deposit (porphyry copper) in Chile. Their focus has been on self-generated properties often in covered areas. They have an enviable record of drilling targets quickly and turning over ground, and bring to Billiton a complimentary fit to the junior investment strategy. A merging of the two approaches and indeed cultures is ongoing.