Everyone in the junior mining business agrees: the worst is over. But that is about the only thing they agree on.
After three years of utter misery and almost nothing in the way of financing and M&A activity, interest in the sector has taken a dramatic uptick in 2014. Equity valuations have improved, metal prices are in a decent upswing, M&A is picking up and, miracle of miracles, companies are raising decent amounts of capital again.
But how meaningful is this turnaround? Well, it depends whom you talk to — the gap between the haves and have-nots is arguably bigger than it has ever been, and seems to be growing by the day.
Junior miners with promising discoveries or feasibility-stage projects with a clear path to production are back in favour. Their valuations are going up and they are tapping the capital markets.
And then there is everyone else.
Analyst John Kaiser calculated there are still about 600 companies with negative working capital, and 850 with less than $200,000 of working capital.
These companies, which are mostly greenfield exploration plays, have effectively become zombies. While many of them have booths at this week’s Prospectors & Developers Association of Canada conference in Toronto and will be mulling around the show, there is zero investor interest in them.
Simply put, the rising tide that lifted the entire junior sector last decade is gone. What we’re left with is a small group of survivors that have separated from the pack and are poised for success in the months ahead. For everyone else, the business is as hopeless as ever.
“I think PDAC this year could actually be fun,” Mr. Kaiser said.
“Because we’ve gotten rid of the BS about gold going to the moon and the China super-cycle taking everything to the moon. The sense of frenzy, that everybody’s in the game, has disappeared. Now it’s only the serious plays which are left.”
Sources who attended recent mining conferences, including the Mining Indaba in South Africa and the Cambridge House show in Vancouver, said they were quieter affairs than prior years, with far fewer companies and investors in attendance. But the people who were there were dead serious and got a lot accomplished.
“Meetings I’ve had over the last few months have been very specific,” said Jed Richardson, chief executive of Great Quest Metals Ltd., whose share price has tripled this year. “They know, on the money side, exactly what they want. And from the company side, they’re very clear and concise about what they have to offer.”
We’ve gotten rid of the BS about gold going to the moon and the China super-cycle taking everything to the moon
Of course, the PDAC show is always more of a zoo than other conferences, and this one will be no different. But the companies with those advanced projects will be hogging the spotlight.
They have outperformed the earlier-stage miners for many months, but it was only recently that the capital markets opened up for them. There has been a flood of equity financings in recent weeks — Canadian miners have announced 36 deals since December that raised roughly $1.1-billion, according to Financial Post data. In the past few weeks, juniors such as True Gold Mining Inc. ($51.9-million), Timmins Gold Corp. ($28.3-million) and Dalradian Resources Inc. ($13.9-million) have raised significant sums of money.
These companies do not need to have world-class deposits with 10 million ounces of gold or 20 billion pounds of copper. In fact, investors are likely to shun projects like that, because they are too large and risky in the current environment. No one wants to see another Tasiast or (even worse) a Pascua-Lama. All these companies need is an economic discovery and a logical path to production, and investors will take it.
“Projects are being scrubbed down to a nugget that works,” Mr. Richardson said.
“Guys have gone back to the prefeasibility that required $400-million and said, ‘Wait a second, we have a high-grade core that we can ramp down on and get in production for $60-million.’”
Vancouver-based True Gold is a perfect example of the type of company that can thrive in this environment. Its Karma project in Burkina Faso is a manageable size with a capital cost of only US$131.5-million. But it can produce about 100,000 high-grade ounces a year and generate a healthy return of more than 40% at a US$1,250 gold price. That is an easy story to sell to investors who do not want to get burned by another high-risk, multi-billion dollar project with poor economics at today’s metal prices.
“Capital is going to the projects that are advanced, and projects that are highly economic at today’s gold prices. Those are very rare. And we have one of them,” True Gold CEO Mark O’Dea said.
He added that investors are willing to put money in if they see that it fills an obvious financing hole on the path to production. True’s latest equity deal, which is its third in nine months, has positioned the company to begin building the Karma mine later this year.
Amid the financing pick-up on Bay Street, something else has been happening: consolidation. The buyers have finally gotten serious about M&A again, with bargain-hunting bids being made for companies such as Osisko Mining Corp., Volta Resources Inc., Augusta Resource Corp. and Chaparral Gold Corp. While these deals have certainly added some energy to the sector, juniors are wary about them as they do not want to get taken out while their stocks trade at a small fraction of where they were three years ago.
At just $59-million, the hostile bid for Chaparral is the smallest of any of those offers. But it may be the one that junior miners are watching the closest, because it comes from private equity. That is expected to be an enormous source of capital (both financing and M&A-related) for this sector in the year ahead, and everyone is simply waiting to see how it takes shape.
Of course, everyone knows that the current optimism in the industry is tenuous at best. A drop in metal prices, another hiccup in emerging markets, or one of a thousand other crises could send investors running from the resources sector again in droves. So those companies in position to take advantage of the current market uptick know that they need to take action now to build their business.
The lesson of the past few years is that no matter how bad a bear market may seem in this space, it can always get worse. As juniors raise some cash and chart a path to the future, they are unlikely to forget it.