BlackRock takes new approach to resource funding

THERE was a sign of things to come in London this week and Australia's resources sector should take note. BlackRock Inc, the world's biggest investor in resources with an estimated $36 billion sunk into the sector, announced it was investing $110 million into an iron ore company.

THERE was a sign of things to come in London this week and Australia's resources sector should take note.

BlackRock Inc, the world's biggest investor in resources with an estimated $36 billion sunk into the sector, announced it was investing $110 million into an iron ore company.

Nothing unusual there, except that BlackRock was not buying shares in the company - London Mining - but rather securing a 2 per cent royalty on all future iron ore sales from the company's Marampa mine in Sierra Leone.

The mine is already producing more than one million tonnes a year, and BlackRock's funding will help expand that ninefold.

BlackRock's top fund manager, Evy Hambro, revealed the company had been reviewing the way it invests, and royalty arrangements had become more attractive as sources of funding had dried up for mining companies.

"It's an attractive deal to BlackRock because [we] can borrow at well below the cost of debt that is available to mid-tier to junior miners and earn a return on investment that's well above that level," he said.

"In today's environment, the banks' ability to lend has been vastly reduced ... bank capital is scarce and, when available, more expensive."

He said the model gave BlackRock exposure to iron ore without direct exposure to the sort of rampant cost inflation that has become the norm in the mining sector, as the royalty is set on sales revenue not overall profits.

Nor will BlackRock's return be beholden to the whims of executive judgments on dividends, and Mr Hambro indicated that this investment would not be the last of its type.

"We continue to evaluate a number of other opportunities that are similar in nature to this royalty," he said.

BlackRock has made no secret of its frustrations with the big diversified miners, who always seem to have another growth project to fund rather than returning a bigger slice of profits to shareholders.

Last year, it resorted to publicly questioning the likes of BHP Billiton over its growth strategy and approach to shareholder returns. It has since put its money where its mouth is, reducing its stake in BHP and Australia's biggest gold producer, Newcrest.

Mr Hambro's suggestion that more royalty-based deals are imminent should give hope to mid-tier Australian miners caught between the scarcity of finance and the market's sudden reluctance to invest in resources stocks.

Such deals have proved successful in the past: in 2006, Manhattan-based investor Leucadia National bought a royalty note on production at iron ore mines being developed by Fortescue Metals.

Fortescue famously went on to become one of the world's biggest iron ore producers, and while the terms of that royalty note are now subject to a legal dispute, the deal has still been wildly successful for both parties.

Royalty and off-take focused companies in North America have indicated they believe the conditions are primed for royalty-type deals to take centre-stage, and Tim Schroeders, fund manager of Pengana Capital, said there was merit in the concept.

"It's pleasing there is this sort of innovation occurring from one of the biggest global investors in mining," he said.

"I've no doubt we will see more of it."

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