Recovery is limited to a very small group of companies. The high-quality juniors 

PDAC 2016: Giant bifurcation underway in junior mining sector

In mining, the great bifurcation is finally underway.

After a multi-year bear market in which nearly 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 limited to a very small group of companies. The high-quality juniors are raising money again and enjoying huge bumps in their share prices. Meanwhile, nothing has changed for most of the companies, which remains entrenched in an awful bear market with no 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 billions of dollars of capital from willing investors. Venture-listed companies raised an astounding $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 from the losses suffered during that boom. As generalists slowly wade back into the sector this year, they are being incredibly careful with their capital. The only companies that can raise money are the best of the best, which are in the process of separating themselves from the pack.

In short, investors are demonstrating actual sanity, something that went sadly missing last decade.

“There’s really just a handful of us who had opportunities to finance in the last few 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.

These companies share several key attributes: they have proven management teams, high-quality assets, reasonable capital costs and are located 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 could have done 18 months ago to double these stocks. They could have drilled into Fort Knox and people would have gone, ‘Hmm.’”

On the other hand, assets with low grades, high capital costs or bad locations still have almost no chance of getting financed. Juniors with 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 vast majority will likely fail.

And of course, hope remains non-existent for the hundreds of “zombie” companies on the TSX Venture Exchange with no 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 will ever put another penny into them.

Many experts continue to think a giant culling of these companies from the public markets would be the best thing for the overall health of the sector. It would shrink the sizable gap between the number of companies and the number of quality assets and management teams.

“It’s very difficult to see those (zombie) companies, in the current 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 referred to the current market as the best bottom-fishing opportunity in his lifetime. Thanks to the structural changes in the sector over the last few years, he said the current market offers investors the “greatest ever” assembly of management talent and high-quality projects, all available at an “unprecedented” valuation.

“This will not repeat itself for a very long time,” he said in a note.

But while the top juniors are enjoying a renaissance, raising capital remains a tremendous challenge.

Salamis said that when Integra raised $16 million in a bought deal last month, several of the institutional investors in the offering spent upwards of six months doing intensive due diligence on the company, including site visits. Five years ago, investors who knew nothing about the company would probably be lining up to give it money.

“In the grand scheme of things, it’s a pretty small cheque compared to the old days,” Salamis said.

Of course, experts noted that the current excitement in the junior mining space could dissipate very quickly. If gold prices drop back below US$1,050 an ounce, the financing window would quickly shut.

There is also a risk that a flurry of financing activity itself will hurt the market in the near term.

When gold streaming firm Franco-Nevada Corp. pulled off a gigantic US$920-million bought deal financing last month, it is safe to say that many 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 market in the short term through sheer dilution and over-exuberance. 

Meanwhile, some miners have the opposite concern: that the huge funds being raised by Franco and Kinross are sucking all the available capital out of the market and leaving very slim pickings for the juniors.

And of course, there is a longer-term worry as well: That if metal prices rebound, all the excesses of the last bull market will return as every company with “gold” in its name gets financed. Anyone who lived through the misery of the last five years knows that this would not be a healthy long-term development for the 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 comes back, the industry is certainly disposed to take it,” Rule said.

But that isn’t a top-of-mind concern. For now, there seems to be plenty of smart money available for the companies that truly deserve it. They can only hope that lasts.

pkoven@nationalpost.com

Twitter.com/peterkoven



PDAC 2016: Giant bifurcation underway in junior mining sector