Are the clouds parting for junior miners?
Slow, volatile recovery under way; exploration interest remains limited
Junior miner Novo Resources (NVO-CSE) checks all the boxes: It’s led by a well-known, connected and respected geologist; it has several prospective gold projects (one of which has an inferred resource) in the low-risk jurisdiction of Australia; it has a tight share structure and supportive shareholders (including Newmont Mining [NEM-NY], which bought a 35.7% stake in the junior last year); and it has managed to deliver both positive news and an increasing share price over the past three tumultuous years.
But the next time Novo needs its next infusion of cash, company president and CEO Quinton Hennigh won’t be looking to the equity market.
“I’m looking at alternative means,” he said in late April. “I can’t speak too much about it at the moment, but we have two opportunities that could actually bring money into the treasury without having to raise equity.”
The company won’t need to raise cash until 2015 — it has $10 million in cash and only plans to spend $4.5-5 million this year. But three years into the current mining downturn, it’s telling that Hennigh, who last led Novo to the market for an equity financing in December 2012 and who released an initial inferred resource of 8.9 million tonnes grading 1.47 grams gold per tonne at the Beatons Creek project last year, is seeking to avoid the equity market.
“The times are just absolutely terrible right now,” Hennigh says. “I’d say this is akin to a depression in the mining sector. And it’s not just juniors — look at the majors, they’re having a very hard time right now.”
Financing remains tough across the mining sector, confirms Michael Faralla, head of global mining and a managing director at TD Securities.
“We’re starting to see some early signs that some companies have some access to capital, but I would say it’s by no means widespread and by no means very deep in terms of there being a lot of capital available,” he said in May.
In the first quarter of 2014, there was a resurgence in mining financings —in particular large bought deals for producing or development-stage gold companies in North America. Detour Gold (DGC-T), Torex Gold Resources (TXG-T) and Rubicon Minerals (RMX-T) all closed bought deals of over $100 million each.
Those deals and about a dozen smaller ones fed optimism that the mining sector was seeing a turnaround, but that optimism has since dissipated. Mining financings fell from $400 million in February and $609 million in March to only $151 million in April.
“There was a period of stability in the equity markets (in January and February) and a strongly recovering gold price that supported that,” Faralla says. “After the end of February, that market window effectively closed again.” While there is little appetite for exploration plays, the market has improved since last year.
Joe Mazumdar, a senior mining analyst at Canaccord Genuity, says the trends in financings, performance and insider trading in the junior mining sector have all been positive this year.
Moreover, although the industry is in a recovery, it’s going to be a slow and unpredictable climb up.
“This has been a U-shaped recovery if anything,” he said in an interview in May, noting that the TSX Venture Exchange bottomed last June.
“I think the U flattened around June 2013 — we're on the other side of it, but this U is a volatile line. That volatility will continue, but I must say that the GDXJ (Market Vectors Junior Gold Miners ETF), which we use as our benchmark for juniors, has far outperformed gold. So there is this pent-up demand and people are looking for leverage.”
The result has been an improvement in sentiment for the industry.
Although that sentiment has flattened after a very positive start to the year, Kevin Campbell, a managing director, investment banking at Haywood Securities, says that the “misery” that pervaded six months ago has abated.
“There has been a predictable pullback from the rally that continued into mid-March, but all is not lost,” Campbell said in an email. “We’re still healthily above the carnage levels of late 2013. Also, base metal equities have actually continued their slow and steady ascent to present. The sub-sector that has really crashed and burned is uranium equities, owing to a punishing, and ultimately illogical, quote on the U3O8 price.”
Even with a generally more positive industry outlook, the vast majority of exploration companies will continue to struggle with limited financing options and a lack of investor interest.
Campbell explains that even flow-through funding — which is only available to Canadian explorers for spending on Canadian projects, and which excludes spending on general and administrative expenses — is harder to come by.
“Flow-through is not an easy answer either, as the funds, after two consecutive challenging years of fundraising, are gearing their investments towards bigger names and the energy sector,” he said. “Premiums being paid on flow-through financings are muted and the number of more meaningful-sized raises in 2014, say between $3 million and $10 million, can be counted on one hand.”
Best betsFor investors looking to acquire exploration plays, Canaccord’s Mazumdar says companies such as Cayden Resources (CYD-V), Cordoba Minerals (CDB-V), Fission Uranium (FCU-V), Alpha Exploration (AEX-V) and Mirasol Resources (MRZ-V) stand out.
The companies have in common management teams that have a history of success, the technical expertise to advance and de-risk their projects, and projects with low or manageable jurisdictional risk. (In the case of Cordoba, which has a gold-copper porphyry project in Colombia, the project is located in an area where infrastructure is good and permitting risk is lower because there are already large open pit mines nearby.)
They also are more likely to find the money they need for exploration.
Fission Uranium, whose Patterson Lake South uranium project with Alpha was the discovery of late 2012 and 2013, had no trouble raising nearly $28.8 million in a private placement of special warrants in April.
Cayden Resources, which is drilling its second of nine targets at the El Barqueño gold project in Mexico and is working towards an initial resource estimate in 2015, raised $9 million in a bought-deal financing that closed in April. Cayden president and CEO Ivan Bebek contrasts the ease with which the financing was completed (he initially asked for $7 million and was offered more than $20 million) with the company’s efforts to raise $5.1 million in August 2012.
“In 2012, we struggled to put together $5 million in funding because it was a near bottom of the entire mining market,” Bebek says. “One financing we were pushing to increase it, to try and get as much as we could, the more recent financing we were scaling it back and just make room for (a few) new shareholders and give us enough cash to take us through the end of next year.”
Of course, it has also helped that Cayden, which is run by the same team that discovered Asanko Gold's (AKG-T) Esaase deposit in Ghana, delivered excellent results from the Azteca target at El Barqueno. The company has $12 million in cash plus $4 million in in-the-money warrants (priced at $1.50 each) that expire in August.
Prospect generator Mirasol has been able to continue a substantial exploration program because of its past success.
In late 2012, Mirasol sold its 49% stake in the Joaquin silver-gold project in Argentina to its joint venture partner Coeur Mining (CDE-NY) for US$29 million and 1.3 million common shares. At the end of 2013, Mirasol had nearly $36 million in working capital. The company is now focused on Chile.
Exploration companies that are still active have also been very careful stewards of their treasuries and share structures.
Novo Resources, for example, recently expanded its joint-venture Pilbara holdings in an all-share deal with well-known prospector Mark Creasy. No cash was involved, with both Hennigh and Creasy eager to see the cash being spent in the ground.
Hennigh says he’s very cautious about spending at the moment, even though Novo has a large, 200-sq.-km prospective land position to explore.
“We tend to be very well focused with our exploration — try to get as much bang for our buck as we can. There’s no money to be pulled out of the market now and it’s in our shareholders’ best interest and the company’s best interest to be conservative, yet carry it forward,” he said. “So it’s kind of like having your foot on the gas and the brake at the same time.”
While Cayden easily raised $9 million in April, it was careful not to take more that it needed.
“We are very anti-dilutive and we wanted to be capital efficient with our share structure because we believe a lot of good results will come out of this project,” Bebek said in late April. “The only reason why you would not take more money in a financing is if you believed you had a lot better results coming and you had reasonable confidence that the market would improve by the time the money you were taking in would start to run out.”
The company also managed to avoid raising funds in the depths of the market rout in 2013 through the sale of some land around the Los Filos mine to Goldcorp for $15.7 million.
Lastly, as investor appetite for exploration stories remains limited, TD’s Faralla says a supportive shareholder base is key to any junior miner’s survival right now.
“A lot of the equity financings we saw in the early part of the year were primarily driven by existing investors rather than by new investors coming into the sector,” he notes.
Hennigh, who took Novo public in 2011 as the industry was just starting to go into a slump, says strong shareholder support has been a key factor in the company's ability to carry on.
“When we financed the company originally, I kept it fairly tight, a fairly small number of investors — all people who were very strong supporters of work I’ve done in the past and of this company and this project,” Hennigh says. “I made it a point to have investors I thought I could go to when times got tough.”
Currently, the appetite for investing in juniors is coming from U.S. investors, both institutional and retail, says Canaccord’s Mazumdar. They’re looking for exposure to gold in areas of low geopolitical risk – namely North America.
“Companies that have decent assets in North America are the ones that are being able to go meet the funds direct and get the institutions to put the placements in. And they might not want a little bit, they might want all of it.”
Cayden’s Bebek says the company saw very strong investor interest out of the U.S. for its last financing, with the company's focus on gold and Mexico being a strong selling point.
Mazumdar notes that in addition to preferring gold projects in North America, U.S. Investors also prefer stocks that are dual-listed.
For example, Golden Queen Mining (GQM-T), which has an OTC listing as well as being listed on the Toronto Stock Exchange, is up 130% year to date. Castle Mountain Mining (CMM-T) has a similar story with a permitted gold asset in California, Mazumdar notes, but it has received less traction.
End in sight?A rebound for juniors will depend on the majors getting their houses in order, says Hennigh, who believes the current downturn is similar to the one the industry went through from 1997 through 2002.
“It was all contingent on how quickly the majors got their costs and their companies under control and I think that we’re not quite through the whole process. I think we probably have another year – maybe 18 months or even two years,” he said.
“I would say the majors are probably two-thirds through the process of righting their ships and once they do, then things will come back because then people can say ‘Ahh – they have an appetite once again to acquire junior companies and that’s really what junior companies are providing is the pipeline or the new deposits for these major companies.”
Exploration Insights editor Brent Cook, who, for the record, was skeptical in the midst of all the optimism that held sway during this year’s Prospectors and Developers Association of Canada convention , has a similar view.
“I think eventually these mining companies are going to have to start buying good assets and get back to exploring.” However, he believes it’s going to take a while to play out and sees the industry stuck in a long bottom. “I don’t really see what’s going to bring us out of this dramatically and quickly,” he said. “I’d like to say an increase in metal prices (will lead us into an upswing) but I’d hate to hang my hat on that.”
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