In mining, the truly amazing bifurcation is finally underway.
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After a multi-year bear market by which virtually every junior mining stock got decimated, the sector is enjoying an honest-to-goodness recovery in 2016. This year’s PDAC conference is ringing with renewed optimism as commodities, particularly gold, are rebounding.
But the early evidence suggests this recovery is restricted to a really small number of companies. The high-quality juniors are raising money again and enjoying huge bumps within their share prices. Meanwhile, nothing is different for many of the companies, which remains entrenched within an awful bear market without any end in sight.
During the commodity boom, the rising tide of metal prices really did seem to lift all boats. Hundreds of low-quality miners were able to raise vast amounts of dollars of capital from willing investors. Venture-listed companies raised a fantastic $4.2 billion from brokered deals in 2007 alone, according to Financial Post data. Ultimately, the vast majority of those funds were flushed away on bad projects with almost no trace they ever existed.
Investors have learned painful lessons in the losses suffered in that boom. As generalists slowly wade into the sector this season, they’re being incredibly careful using their capital. The only real companies that can raise money are the most useful of the greatest, which are while separating themselves from the pack.
In short, investors are demonstrating actual sanity, something that went sadly missing last decade.
“There’s really just a number of us who had opportunities to finance within the last couple of months,” said George Salamis, chairman of Integra Gold Corp.
Along with Integra, the select group includes Kaminak Gold Corp., NexGen Energy Ltd., Gold Standard Ventures Ltd. and a few others. They have all enjoyed incredible stock price gains, even with the dilution from their financings.
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These companies share several key attributes: they’ve proven management teams, high-quality assets, reasonable capital costs and are situated in mining-friendly jurisdictions.
“You’ve got good location, a viable theory, and good data, combined with good promotion, doubling these stocks,” said Rick Rule, president of Sprott U.S. Holdings Inc. and a major financier of junior resource plays.
“There was nothing you might have done 18 months ago to double these stocks. They could have drilled into Fort Knox and individuals would have gone, ‘Hmm.'”
On another hand, assets with low grades, high capital costs or bad locations still have almost no chance of getting financed. Juniors using these sorts of projects are desperately seeking ways to reduce their capital requirements and lower their overall risk to attract investors. While some may succeed, the great majority will probably fail.
And of course, hope remains non-existent for the countless “zombie” companies on the TSX Venture Exchange without any capital and no ability to create value for investors. Trading liquidity in these firms remains almost non-existent, and it is hard to imagine a scenario where serious investors is ever going to put another penny into them.
Many experts continue to think a giant culling of those companies from the public markets would be the best thing for the overall health from the sector. It might shrink the sizable gap between your number of companies and the number of quality assets and management teams.
“It’s tough to see those (zombie) companies, in the present circumstances, finding a way out,” said Michael Pickersgill, co-head of the metals and mining practice at Torys LLP.
Just about everyone sees this bifurcation as healthy. The excesses of the last bull market have been wrung out of the system, and cheap buying opportunities abound.
Junior mining analyst John Kaiser known the present market as the best bottom-fishing opportunity in his lifetime. Thanks to the structural alterations in the sector during the last few years, he said the current market offers investors the “greatest ever” assembly of management talent and high-quality projects, all offered at an “unprecedented” valuation.
“This will not repeat itself for any very long time,” he explained in a note.
But as the top juniors are having a renaissance, raising capital remains a significant challenge.
Salamis asserted when Integra raised $16 million inside a bought deal recently, several of the institutional investors within the offering spent up to six months doing intensive research on the company, including site visits. Five years ago, investors who knew nothing about the company would probably be arranging to give it money.
“In the grand scheme of things, it is a pretty small cheque compared to the past,” Salamis said.
Of course, experts noted the current excitement in the junior mining space could dissipate quickly. If gold prices drop back below US$1,050 an ounce, the financing window would quickly shut.
There is another risk that the flurry of financing activity itself will hurt the marketplace in the near term.
When gold streaming firm Franco-Nevada Corp. pulled off a huge US$920-million bought deal financing last month, it’s safe to say that lots of gold companies started calling their brokers and inquiring about raising money themselves. (Indeed, Kinross Gold Corp. subsequently tapped the market for US$250 million.) Rule said there is a good chance more equity issues will follow and derail the marketplace in the short term through sheer dilution and over-exuberance.
Meanwhile, some miners possess the opposite concern: that the huge funds being raised by Franco and Kinross are sucking all the available capital from the market and leaving very slim pickings for the juniors.
And obviously, there is a longer-term worry as well: That if metal prices rebound, all of the excesses from the last bull market will return as every company with “gold” in its name gets financed. Anybody who survived the misery from the last 5 years knows that this would ‘t be a healthy long-term development for that sector.
While it seems highly unlikely that investors would repeat their previous mistakes, history does tend to repeat itself in mining.
“If the dumb money returns, the is certainly disposed to consider it,” Rule said.
But that isn’t a top-of-mind concern. For now, there appears to be lots of smart money available for the businesses that really deserve it. They can hope that lasts.
pkoven@nationalpost.com
Twitter.com/peterkoven
