Mining Finance in Toronto
The mining sector’s financial cornerstone
Toronto has long been the home of mining finance, anchored by investment banks, mining brokerages and the Toronto Stock Exchanges (TSX and TSXV). However, the days of raising finance in an afternoon on Bay Street alone are a thing of the past, even considering current robust metals prices. Financial road shows and virtual conferences across North America, Europe and Asia, newsletters, analyst coverage, social media influencers and royalty and streaming companies, mean companies have to cast their nets wide to attract project finance, as a reduction in brokerage activity combined with new-age competition from the likes of crypto and cannabis has made raising capital a multi-layered task.
That being said, Canada’s biggest city, and in particular its capital markets, remain the industry’s cornerstone. Dean McPherson, head of business development for global mining at the TMX Group, gave the example of Newcrest Mining (TSX: NCM), Australia’s largest gold producer, listing on the TSX in October 2020 to “gain global exposure” (according to its CEO, Sandeep Biswas), as an illustration of the global appeal of Toronto’s stock exchanges, which represent double the amount of listed mining companies than its nearest competitor, the ASX.
Statistics courtesy of TMX Group
Can precious metals reclaim new highs?
On January 6th, 2021, Democratic candidates Jon Ossoff and Raphael Warnock won the Georgia senate runoff to trigger the ‘blue wave’, giving the Biden administration control of the Presidency, Congress and Senate. At the same time, Covid-19 was ravaging the Northern hemisphere, with record mortality rates across North America and Europe. Such a context, with the unprecedented fiscal stimulus seen in 2020 expected to increase in 2021, would surely be perfect for gold? In the following two days, gold would drop over US$100 from US$1,960/oz to under US$1,850/oz. Why did this happen? A move upwards in real rates, probably the most important driver for gold, is one factor. However, real rates remain negative, and the other prominent hedge against fiat currency – crypto – has boomed. Bitcoin’s dramatic ascent from US$10,000 in September 2020 to over US$40,000 in January 2021 can be seen in sharp contrast to gold’s performance in a similar timeframe, correcting from its US$2,076/oz all-time high in August 2020 and treading water in the US$1,770 to US$1,960 range since.
A more sinister factor has also contributed to gold’s failure to ignite. In September 2020, JP Morgan agreed to pay more than US$920 million to resolve US authorities' claims of market manipulation, the largest sanction ever tied to the illegal practice known as spoofing. Over eight years, 15 traders at the biggest US bank caused losses of more than US$300 million to other participants in precious metals and Treasury markets. In January 2021, Deutsche Bank agreed to pay more than US$130 million to resolve a government investigation into violations of the Foreign Corrupt Practices Act (FCPA) and a separate investigation is ongoing into a commodities fraud scheme. The charges include manipulative commodities trading practices involving publicly-traded precious metals futures contracts.
For retail investors in particular, such manipulation can be dispiriting. You study market fundamentals, research companies, projects and management teams, only to be repeatedly knocked back even when macro conditions seem extremely favorable. All this while the Robinhood generation of investors blindly plough their stimulus checks into Tesla stock heading to the moon, despite a 1,500 to 1 price-to-earnings (PE) ratio.
While the current precious metals correction may have lasted longer than expected, PM bulls still have good reason to remain optimistic. Andrew Kaip, managing director of equity research at Red Cloud Securities and former senior gold analyst at BMO, described the post-August consolidation as healthy. “The amount of government debt is such that it will take years to switch away from low and negative real treasury bond yields: the most significant driver for the price of gold,” said Kaip, suggesting we are heading towards stagflation. “Governments will rise the monetary base to cover their obligations and this will bring inflation coupled with non-existent growth.”
Michael White, president and CEO at IBK Capital, believes we are still in the early stages of the bull market. “We will look back at current gold prices as the building of a base before moving higher, rather than a peak,” he stated, pointing to the run up in gold at the start of the previous cycle in 2000, where gold broke out from US$250/oz to peak at over US$1,900 in 2011.
If the current cycle, which started at US$1,200/oz in 2018, sees a similar run up, perhaps forecasts of the likes of Pierre Lassonde (US$20,000/oz) and Nick Barisheff (US$10,000/oz) will not seem so far-fetched. Even Bitcoin bull, Max Keiser, predicted that gold will move to US$3,000/oz and silver to US$100/oz by the end of 2021 in a January interview with Daniela Cambone of Stansberry Research.
Macro conditions seem ideal for a secular bull run, but in a market increasingly built on sentiment rather than value, catalysts such as the successful roll-out of Covid vaccinations and economies reopening in the summer could take the wind out of gold’s sails. For mining investors, focusing on companies with growth profiles that can create value regardless of PM prices remains the most prudent strategy.
“That kind of thinking, whereby companies are taking extra country risk in return for a super deposit, is not as evident as it was years ago. People would rather have a more modest project with lower risk.”
Keith Spence, President & CEO, Global Mining Capital Corp.
What investors want, and what to avoid
As money flows into the exploration segment, there are a myriad of red flags investors must be cognizant of, as lifestyle companies pop up and previously dormant juniors reappear with rehashed stories about projects that often continue to be flawed. Red Cloud’s Andrew Kaip suggested that the most fundamental red flag for mining investors is the construct of management: “There has to be confidence in the team’s capability to achieve their objective. Management teams that do not have the in house expertise and rely solely on external sources to deliver project advancement increases risk for the investor.”
Furthermore, Kaip listed overly-optimistic assumptions on delivery of key milestones in development and exploration as a risk factor, as well as the geological risk carried by exploration stage companies, especially for pre-resource stories.
Michael White of IBK Capital echoed the sentiment that it is important for management to manage expectations and provide clear communication, as no company is immune to shareholders with short patience. “Drilling just for the sake of drilling is never a good idea and will ultimately waste the money of those who invested,” he said, adding that the best projects will attract money and have success, even if it takes a little longer than some people expect.
High precious metals prices also spurn new public listings, as privately run juniors look to ride the wave and take advantage of financing opportunities. “Across our markets compared to last year, the number of financings and new mining listings are up 33% and 59%, respectively, while the amount of capital raised is up 39%,” revealed Den McPherson of the TSX, quoting figures until August 2020.
Keith Spence, president and CEO of Global Mining Capital Corp., took note of the bullish sentiment around miners with projects in Canada. He explained that prior to the current bull market, financiers would focus on projects with a large resource, good reserves and good grades, while dispelling political risk. “That kind of thinking, whereby companies are taking extra country risk in return for a super deposit, is not as evident as it was years ago. People would rather have a more modest project with lower risk,” Spence said.
During the process of listing publicly, companies must be cognizant that raising the cash is not the only factor to consider. “One of the key mistakes management teams make involves the capital structure of companies when they plan to go public,” explained Denis Frawley, partner at Toronto-based law firm Ormston List Frawley LLP, noting that proponents can be rushed by favorable market conditions and neglect aspects such as the share structure and meeting market requirements in order to classify for listing. “It is also very important for management to work closely with their audit partners to plan and manage expectations well, and to clearly present the company’s financial structure to shareholders early.”
For the bull market to really take off and reach new heights, generalist investors must return. For this to happen, the industry’s reputation for wasting capital must also improve. Fortunately, 2020 was a banner year for FCF producing miners, and even at US$1,800/oz gold this should continue. As rebuilding confidence with investors takes time, miners must stick to capital allocation programs predicated on US$1,200 gold prices, suggested Kaip. “In 2021, it will become more acceptable for reserve prices to move higher, but operators need preserve a respectable margin for investors,” he reflected, stating that the priority should be to maintain EBITDA margins that insure there is sufficient FCF generated above project capital to allow for growing dividends.