PDAC 2016: Giant bifurcation underway in junior mining sector

In mining, the great 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 first evidence suggests this recovery is restricted to a very small group of companies. The high-quality juniors are raising money again and enjoying huge bumps within their share prices. Meanwhile, nothing has changed for many 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 could raise vast amounts 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 that cash were flushed away on bad projects with very little 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 best of the greatest, 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 only a handful of us who had possibilities 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 some others. They have all enjoyed incredible stock price gains, even with the dilution using 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 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 might have gone, ‘Hmm.'”

On the other hand, assets with low grades, high capital costs or bad locations have very little chance of getting financed. Juniors with these sorts of projects are desperately seeking ways to reduce their capital requirements minimizing their overall risk to attract investors. Although some may succeed, the vast majority will probably fail.



And obviously, hope remains non-existent for that hundreds of “zombie” companies around the TSX Venture Exchange with no capital and no capability to create value for investors. Trading liquidity in these firms remains almost non-existent, which is hard to make a scenario where serious investors is ever going to put another penny into them.

Many experts still think a huge culling of these companies from the public markets will be the best thing for the all around health from the sector. It would shrink the sizable gap between the number of companies and also the number of quality assets and management teams.

“It’s tough to see those (zombie) companies, in the present circumstances, getting a way to avoid it,” 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 happen to be wrung out of the system, and cheap buying opportunities abound.

Junior mining analyst John Kaiser known the current market because the best bottom-fishing opportunity in the lifetime. Because of the structural changes in the sector during the last couple of years, he said the present market offers investors the “greatest ever” assembly of management talent and high-quality projects, all available at an “unprecedented” valuation.

“This won’t repeat itself for any long time,” he said inside a note.

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

Salamis asserted when Integra raised $16 million inside a bought deal last month, some of the institutional investors within the offering spent upwards of 6 months doing intensive due diligence around the company, including site visits. 5 years ago, investors who knew nothing concerning the company could possibly be arranging to give it money.

“In the grand general 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 quickly. If gold prices drop back below US$1,050 an ounce, the financing window would quickly shut.

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

When gold streaming firm Franco-Nevada Corp. performed a gigantic US$920-million bought deal financing recently, 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 marketplace for US$250 million.) Rule said there is a pretty good possibility more equity issues follows and derail the market for 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 out of the market and leaving very slim pickings for that 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 the name gets financed. Anybody who lived through the misery of the last 5 years recognizes that this would not be a healthy long-term development for the sector.

While it appears highly unlikely that investors would repeat their previous mistakes, history does have a tendency to repeat itself in mining.

“If the dumb money returns, the is certainly disposed to consider it,” Rule said.

But that’s not a top-of-mind concern. For now, there appears to be lots of smart money readily available for the businesses that really deserve it. They are able to only hope that lasts.

pkoven@nationalpost.com

Twitter.com/peterkoven