"While the incredible 2019 performance of a small section of the industry is an encouraging sign moving forward and should attract some investor confidence, a lack of new listings and the continued struggles of the junior community to attract finance have created a chasm between those who produce, and those who explore.”
Image courtesy of Zia Syed
Toronto remains the global investment engine of the mining industry through its stock exchanges, mining-focused financial services, consultants, legal advisors and banks that have a long history of financing projects from early stage exploration through to production. With almost twice the number of mining companies listed on the TSX and TSX.V (approximately 1,200) compared to its nearest competitor, the ASX, even companies that have never had or will likely never have operations in Canada choose to be headquartered in Toronto for its access to capital.
In October 2019, the TSX30 program was launched to highlight the top 30 performers on the main exchange over the last three years based on dividend adjusted share price appreciation. Considering the challenging market conditions in that time period, it is a welcome surprise that eight of the companies on the list are in the mining sector, five of which are headquartered in Toronto, with Kirkland Lake Gold being the fourth best performer overall with over 600% return. “The program showcases that investors can still receive great returns in the mining market,” commented Dean McPherson, head of business development – global mining at the TMX Group, noting the significant role that management and jurisdiction play in encouraging investor appetite.
Although these success stories are encouraging, they do not paint the full picture. While the incredible 2019 performance of a small section of the industry is an encouraging sign moving forward and should attract some investor confidence, a lack of new listings and the continued struggles of the junior community to attract finance have created a chasm between those who produce, and those who explore.
“In terms of new listings and financings, 2019 has been a bit volatile, not only for the mining sector but across the board,” acknowledged McPherson, before noting that this is truly a global issue, as the number of new listings on TMX Group’s equity exchanges in 2019 still outweighed those of its major competitors combined.
In such a context, companies need to cast their nets wide when sourcing capital, and a roadshow that includes the United States, Europe and Asia requires juniors to demonstrate more than just promising drill results. “My theory is that there has been a renaissance in mining, whereby a lot more is demanded from companies as the sector in general has matured. The companies, the environment and investors have all changed, demanding greater ROI,” reflected McPherson.
Despite the struggles of the junior market, the outlook for metal demand is robust, and the fact remains that mines need to be discovered, financed and put into production – a process that does not happen overnight. A distressed market also presents opportunities, and the disparity between bullish precious metals prices and declining junior share prices is not sustainable. “There is now the opportunity for longer term investors to look at the undervalued juniors and take advantage of the current market,” observed Ryan Matthiesen, managing director of investment banking at Haywood Securities, adding: “If you have the ability and patience to analyze and evaluate assets and teams, you will find great opportunities.”
Raising Finance in 2020: What Are Investors Looking For?
With further M&A activity expected between the precious-metals mid-tiers and “cannabis 2.0” on the horizon as edibles, beverages and vaping products enter the Canadian market, the competition for investment dollars looks set to remain stiff in 2020. How, then, can the downtrodden junior community stand out from the crowd?
“What I like about an early bull market is that it separates the good from the bad,” stated Michael White, president and CEO of IBK Capital, the private investment firm that has helped to raise finance for the likes of Great Bear Resources (GBR) – the standout junior stock of 2019. “Management has to be very convincing in order to obtain capital. There must be a strong vision that is backed with historical data and reliable results, as well as a tested team that can be trusted to deliver results,” explained White, noting that investors will be put off if due diligence and planning are not prioritized in the rush to drill. “There is a lot of competition for funding. Being thorough with a strategy and prepared for execution is far more attractive than rushing to get results,” he added.
From the point of view of the investor, what should exploration companies focus on to impress the market, and are there indications that a stock may have reached its peak? “A comment that applies to any exploration discovery is that continuous exploration and expansion of a deposit are important for the company’s market valuation,” said White, pointing to the success of GBR’s strategy to continually step-out and add new mineralization at its Dixie project. “If a company’s sole focus turns to infill drilling, converting inferred resource to indicated or measured, this might be an indication that the stock has reached its limits,” he concluded.
Keith Spence, president & CEO of Global Mining Capital, echoed the sentiment that preparation is key, suggesting that junior companies often go public too hastily: “If a company remains private, puts its house in order, gets rid of some of the risks and then goes public, it will have a better product to offer the market.”
Noting a significant structural change in mining industry financing, Spence explained that a strong retail base had made Toronto into a global financial center for mining, but the amount of institutional money grew and eventually the retail market disappeared: “Many investors have left the mining space after losing huge amounts of money due to major financial disasters and scandals during the last 20 years, such as the massive gold mining fraud by Bre-X Minerals.”
A reoccurring theme in Global Business Reports’ research and interviews was the growing importance of team and jurisdiction. Terry Harbort, president and CEO of Talisker Resources and VP exploration for Sable Resources, related how over the last 10 years, there have been approximately 200,000 drill holes drilled in the global mining industry, yet only 38,000 of these drill holes actually had a significant intercept. “The discovery rate in the industry is 0.6%, so investors want to invest in the 0.6% of the industry that has actually found something,” said Harbort, noting that Sable Resources’ team has been responsible for discovering approximately 40 million oz globally.
Ryan Matthiesen commented that advanced projects in the right location with a clear path to production, backed by a good management team and strong investor base, will attract interest: “Capital is migrating to more secure jurisdictions, and investors are willing to pay a premium for stability, a factor that is more important than it was a few years ago.”
The Rise of The Royalty & Streaming Model
Gold and palladium producers were not the only mining players to enjoy a fruitful 2019. Another group, those in the royalty and streaming space, has been growing exponentially over the last decade, regardless of market conditions. Since 2008 when Franco-Nevada resumed trading, the core royalty and streaming group is up roughly 470%, in comparison to the S&P 500, which is up 96%, gold bullion up 87% and the S&P/TSX Global Gold Index down 25%.
Two of the inaugural TSX30 cohort are royalty and streaming companies – Anglo Pacific group (#15), the only royalty and streaming company listed on the London Stock Exchange, and Labrador Iron Ore Royalty Company (LIORC) (#12), which owns a 7% royalty on Iron Ore of Canada (IOC), a 15.1% equity interest in IOC, and a commission that pays 10 cents per tonne of all product produced at IOC.
John Tuer, president and CEO of LIORC, reflected that, while the TSX30 is a nice snapshot of a three-year period of both capital gains and dividends, it is the company’s longer term returns that he is most proud of: “Since our IPO in 1995, LIORC has returned over 14% per year to our shareholders. The return on the TSX over the same period of time was about 7%.”
From a macro perspective, mining companies typically use royalty and streaming when equity becomes more expensive and when their share prices are down. While the model was originally focused on producers’ non-core assets, it is now becoming increasingly popular among project developers that require financing, such as Minera Alamos, which announced a C$14 million royalty/equity construction package with Osisko Gold Royalties in December 2019. “This partnership, coupled with targeted optimizations, will greatly reduce the upfront funding requirements of what is already a low capital cost operation,” stated Jason Kosec, Minera Alamos’ vice president of business development.
Alex Pernin, CEO of newly formed Star Royalties, spoke of the advantage royalty and streaming companies provide investors with commodity price leverage, expansion and optimization upside, reserve and resource growth, as well as exploration potential, without the associated mining costs, nor operations management. Emphasizing the vast difference in the operational management of a mining company compared to a royalty and streaming company, Pernin observed: “When I was at Barrick Gold, we had 14,000 employees and a US$20 billion market capitalization; Franco-Nevada also had a US$20 billion market capitalization but had 34 employees.”
If the definition of insanity is doing the same thing over and over again and expecting different results, there is a case to be made that a number of those limiting themselves to sourcing investment through traditional sources deserve to be sectioned. While that may seem a tad harsh, the fact that financing has declined whilst gold has reached record highs in Canadian dollars surely implies that change is necessary. Fortunately, a number of players in the mining finance space have broken from the traditional mould to offer the market something different.
Red Cloud Securities (formerly Red Cloud Klondike Strike) rebranded in 2019 to demonstrate its position as a modern-day, next-generation brokerage firm, according to its new CEO Bruce Tatters. Explaining how a 90% reduction in institutional commissions in the brokerage industry over the last two decades has severely hollowed out corporate access services in the small cap universe, Red Cloud decided not to have a trading operation like traditional legacy brokers have adopted since their inception. “Our institutional equity department focuses on institutional corporate access marketing for companies,” said Tatters, mentioning the wide platform of services Red Cloud offers that goes well beyond the offerings of traditional brokerages including retail marketing, social media services, advisory, graphics support, video services and web development.
Unlike traditional brokers whose outreach is restricted to trading clients, Red Cloud’s institutional portfolio manager outreach is over 250 globally registered companies in the mining space and does not require a company to trade. “We communicate our research to companies via links to our website so they can register with us,” explained Tatters, concluding: “It is a truly unique monetization system focused for our corporate clients.”
One of the recent entrants to the mining finance market, and one of the most innovative, is Tradewind Markets, which has built a technology platform for digitizing the ownership and trading of physical assets in the precious metals space. Michael Albanese, Tradewind’s CEO, expanded on how his company is making it easier, more cost effective and more secure to buy, sell and hold precious metals: “We make it very easy for retail individuals to purchase metals through a network of brokers that handle our product. The gold and silver is held physically at the Royal Canadian Mint – which is a sovereign and secure location – and we use blockchain technology to maintain and record ownership.”
Additionally, Tradewind’s Origins tool allows buyers to specify criteria to purchase metal from a certain mine, method of production and geography. “Tradewind’s ORIGINS solution makes ESG principles tangible and actionable,” said Albanese, continuing: “As a miner, you will also benefit because you will be able to showcase that you are producing according to responsible standards.”