The US-based resources private equity fund opened an office in Perth in 2013, a deliberate move to coincide with the start of the downturn.

In an interview with MiningNews.net, Koth said the Australian resources market had been plagued by inflated expectations and valuations.

Despite billions being wiped from the value of Australian miners, Koth said there was still a way to go.

“Our feel of the market environment might be wrong, but it’s our feeling that we’re still two years away from the bottom of the market and we’re going to stay there for five to seven years,” he told MNN.

“We still think that most companies in the market have unrealistic expectations.”

Koth believes Australian projects are still too high cost.

“We think the operating cost structure must, at the very least, go another 30%, before even a significant number of mining projects in Australia are economically viable,” he said.

“The Australian/US dollar should not drive the costs down, the real costs need to go down, so if you’re going to rely on the exchange rate, in my opinion, you don’t have a business case.”

Koth said the mining industry wasn’t in crisis – it was simply returning to a state of pre-boom normality.

“What it was before was a flat line, where maybe one in 100 projects get funding and maybe one in 50 senior executives manage to raise backing for a business venture – that’s how it always was,” he said.

“That normal status quo was interrupted by this bubble, now the bubble has come and all that’s happened is we’re just going back to what’s normal.

“And we’ve not yet hit what’s normal. It’s still inflated.”

In a damning assessment of the Australian mining sector, Koth said 95% of the listed juniors should never have existed in the first place.

“If I’m cynical, I say 80% of the ASX-listed mining sector still has a market cap larger than zero, which means 80% of the ASX-listed mining sector is still overvalued, because it should actually be zero,” he said.

“So, I can take the cynical view that as long as the ASX-listed junior mining companies are not worth zero, then actually the sector is overvalued.

“So there are a lot of unviable propositions being punted and promoted on the market, and then a lot of investors, who probably in most cases don’t understand what they’re doing, put their money into a sector they don’t understand, based on inflated valuations.

“I guess that’s what you call a bubble.”

Koth said any project that didn’t stack up at today’s commodities prices should never have been invested in.

“What is not viable today deserves to go bust because it shouldn’t have been invested in and built in the first place,” he said.

Koth believes there is around $US15 billion of private equity funds available to the mining sector.

“That money usually gets deployed over a four-year cycle, which gives you roughly $3-4 billion a year – that’s not a lot.

“The risk capital available to mining is tiny compared to what it was before.

“In my opinion, it’s not going to expand significantly.”

Despite popular belief, private equity is not going to “save” the mining industry.

“Private equity will only flow to a handful of the very best projects and a handful of the very best people, and the rest, if they can’t find money from somebody else, will fall off the back of the truck,” Koth said.

Denham has been screening Australia for the best projects, through two local management teams it is backing.

“My assessment is that in all of Australia, in the below $A500 million range, there is maybe 15 viable mining projects – and that might be too generous,” he said.

“It’s a handful of assets sitting in distressed juniors, it’s a handful of non-core assets sitting in mid-caps, it’s a handful of low-growth or non-core assets that might come out of the majors, but it’s not such a huge playing field.

“What’s happening is, the limited number of opportunities is more easily and accessible at better terms.”

One of those projects Denham obviously likes is Mungana Goldmines’ Chillagoe base metals assets.

Denham-backed vehicle Auctus last week made an unsolicited $38 million takeover for Mungana, headed up by former Karara Mining CEO Steve Murdoch.

“We backed Steve Murdoch and his team with $130 million and that could go up to $200 million or more,” Koth said.

“So their business case is simple – secure two or three projects in Australia and get them into production hard and fast.”

The other team Denham has backed is led by former Gloucester Coal CEO Barry Tudor.

“The business plan is simple – build a new medium metallurgical coal company from the ruins of what’s left of the coal companies,” Koth said.

Denham’s starting point is the people, not the projects and the company only backs local teams in their own backyard.

“We fund the best possible talent of people on a private basis,” Koth said.

“They go out with our capital and secure those assets and move them up the value curve.”

He stressed that both teams were not under any pressure to hurry with deals.

“There is no rush because you’re not missing anything right now,” Koth said.

“We’re sitting in a market that’s a falling knife. We’ll only act on opportunities that every single one of our boxes is ticked.”

But Koth is adamant that the only way to make returns in this market is through producing assets, which would be at the cost of exploration.

“We have historically backed a lot of exploration and quite successfully,” he said.

“It’s just not the right time in the market to do that, because it takes you so long until you make money out of successful exploration in the current market, and time is money, but right now we are almost singularly focused on a manageable runway to cashflow because it’s the only game in town that I’m confident about we can make money within a time horizon that fits our own investors.”

As a result, explorers will continue to struggle.

“We have situations where we have secured fully delineated mineral deposits at a 50-60% discount of the money that other people spent on it,” Koth said.

“So if you were successful in exploration, you’re actually probably going to lose your money.

“The value curve is pretty much a flat line until you get stuff into production.”

Unsurprisingly, Denham’s Perth office is inundated with approaches from juniors, which has forced Koth to be selective with who he meets with.

“If someone comes with three drill holes and half a percent copper somewhere in the middle of nowhere, who cares,” he said.

“That’s nothing that anyone would be able to make money out of.”

And while he expects things will get “significantly worse” for juniors, he said there was a light at the end of a very long tunnel.

“On a positive note, those who are left standing when the next seven years are over, are going to be in pretty good shape,” he said.