The Junior Sector Reignites

High metals prices mean drills are turning and new juniors are listing

Although the downward trend in exploration expenditure in Peru continued in 2020, with a reduction of 37.5% compared to 2019, this does not tell the full story. It was a tale of two halves, as the crash in Q2 was followed by a dramatic rise in metals prices in Q3, led by precious metals, before base metals took over. By 2021, copper’s relentless ascent and silver’s mainstream coverage had spawned a number of new companies and a flurry of drill results.

Since stage two of Peru’s mining reactivation plan allowed exploration activities to restart in July 2020, gold hit an all-time high of US$2,076/oz in August, silver approached the US$30/oz mark for the first time in eight years, and copper reached an all-time high in May 2021, trading over US4.75/lb. The favorable market conditions saw three new junior IPOs in Peru in Q4 2020, with Pucara Gold (TSXV: TORO) and Kuya Silver (CSE: KUYA) going public in October, followed by Element 29 Resources (TSXV: ECU) in December. This trend has continue in 2021, with Tier One Silver (TSXV: TLSV) listing in June, and Forte Minerals, Sombrero Resources, Silver X and Mantaro Silver all expected to list in the second half of the year.

Guillaume Légaré, head of South America at the Toronto Stock Exchange and TSX Venture Exchange (TMX Group), illustrated the uptick in junior activity globally when revealing the annual results of the two exchanges. The number of financings on the TSXV and TSX in 2020 increase by 30% in comparison to 2019, equating to C$2.9 billion equity capital raised for companies that have mining projects in Latam. In Peru, home to the TMX Group’s South American HQ, Légaré praised the stability of the country’s mining sector and regulatory environment.

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The improved sentiment for juniors was affirmed by Jorge Granda, general manager of AK Drilling, who related that his company’s client portfolio in February 2021 was made up of 60% juniors and 40% producers, compared to a 70/30 producers/juniors split in February 2020.

Ivan Bebek, co-chair of Tier One Silver and president and CEO of Sombrero Resources, two new Peru-focused juniors spun out of Auryn Resources, has been working in Peru for over a decade. “A year or two ago, I would have complained about the length of time it takes to obtain permits,” he said, before observing the shift that has taken place since Covid, with actions backing up the rhetoric of authorities who have vowed to streamline permitting.

“One of the most important adjustments the ministry made was allowing companies to trench without needing a drill permit to support early-stage exploration,” continued Bebek, revealing that Tier One Silver obtained the FTA permit for its flagship Curibaya project in a period of five months.

“The prior consultation process that has been put into place means that permits for a declaration of environmental impact take 18 to 24 months and local communities end up being consulted twice. In comparison, the permits in Chile take three months and in Canada only two weeks.”

Enrique Garay, President, ProExplo 2021

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Cumbersome bureaucracy must be addressed

Although the good will of some of the Peruvian authorities, such Jaime Gálvez, to speed up the permitting process has not gone unnoticed in recent years, it is hard to achieve meaningful progress in a context of constant political change. Regardless of the intentions of Peru’s mining ministers, there has been little time to implement policy in a country where the presidency has changed hands five times in less than three years. Peru needs a sustained period of stability to attract investment dollars that have migrated to jurisdictions perceived as safer, such as Canada and Australia.

Paul Murphy, manager of Mining Plus’s South American office, commented that he had spoken to a number of people working in the junior space who have mentioned the challenges and uncertainty with regard to the timing of permits and lack of continuity of the leadership within the MINEM. “These people spend a lot of time developing relationships and trust with local communities, and when there are frequent changes in government and ministerial positions, it can be a serious challenge to contend with,” he said.

An illustration of how there is still plenty of room for improvement came from Enrique Garay, president of the IIMP’s ProExplo 2021 event and SVP of geology for Rio2 Limited (TSXV: RIO). “The prior consultation process that has been put into place means that permits for a declaration of environmental impact take between 18-24 months and local communities end up being consulted twice. In comparison, the permits in Chile take three months and in Canada only two weeks.”

Miles Thompson, president and CEO of Lara Exploration (TSXV: LRA), which holds the Lara copper porphyry JV with Minsur and the Corina gold-silver JV with Hochschild, observed that Peru has a good mining code and a straightforward process to register a claim, but to get anything done in the field is much harder. Comparing the Peruvian situation to other jurisdictions where Lara also has projects, Thompson gave the example of how in Brazil agreements can be made directly with private landowners, whereas in Peru there is a need to deal with various local communities and authorities that don’t interact and are slow to make decisions, and everything must go through Lima.

“The problem for Peru now is that the reforms necessary to improve its mining climate will be hard to implement due to a distrust in the political class in the country, a divided congress and local communities who have often not seen the benefits of the taxes and royalties paid by mining companies.”

Miles Thompson, President & CEO, Lara Exploration

Thompson summarized the challenges the Peruvian mining sector is faced with: “The problem for Peru now is that the reforms necessary to improve its mining climate will be hard to implement due to a distrust in the political class in the country, a divided congress and local communities who have often not seen the benefits of the taxes and royalties paid by mining companies.”

Speaking shortly before the second round of the general election, Steve Zuker, president and CEO of Pucara Gold (TSXV: TORO), revealed that Pucara has had discussions with and received many calls from investors concerned about the current situation. “It is hard to get people’s attention when there are already so many options for investors and when you then have headline risks, the cost of capital increases significantly,” he reflected, adding that only those with a greater risk appetite seem to be interested.

Now, as Pedro Castillo prepares to assemble his new government, how could the new regime impact the junior sector in Peru? On one hand, early-stage exploration does not create an iota of the environmental impact of a mining operation, so those with permits in hand should be able to add value through the drill bit. Furthermore, the price action in juniors with Peruvian projects since the first round of the election in April meant that they were already trading at a discount by the time Castillo was confirmed as president. From an investment standpoint, undervalued assets during a metals upcycle are attractive and hard to find.

However, one should not be dismissive of the threat that a candidate who rose to power on the back of anti-mining rhetoric poses. For the investment community to embrace a country that had lost competitiveness even under moderate governments, the political turbulence that has characterized the country must now settle. Exploration is the lifeblood of mining, and Peru is a mining country. The hope is that this will not be lost on the incoming authorities.

Image courtesy of Tier One Silver