Mining Finance and Investment
Toronto remains the epicentre for mining capital
Take a cursory glance at the Lassonde Curve and it is clear that bringing a mine from exploration into production is a remarkably treacherous ride. Although the Lassonde curve is a widely respected theoretical framework that mining investors use to analyze equity valuations relative to the development stage, it does not account for broader macroeconomic and geopolitical factors that could amplify risks and dampen valuations. In 2022, war between Russia and Ukraine ratcheted up uncertainty and exacerbated already ballooning energy costs, which has compounded inflationary pressures already being felt from rising labor costs across the industry. As a result, miners are in an increasingly tenuous position with respect to managing costs. Although inflationary periods have historically been bullish for commodity prices, even precious metals, which typically act as vehicles of wealth preservation, have recently been hindered by a US Federal Reserve that is raising interest rates at a clip not seen since baby boomers were in the early days of their careers.
Given the torrent of risks associated with this macroeconomic setup, and the prevalence of the dreaded head and shoulders technical chart that a host of publicly traded mining stocks have been plagued by, it would be easy to understand why an investor might shun the sector. Nevertheless, mining continues to underpin economic growth, so it is essential that capital remains available for the full range of companies involved in the industry. Financial institutions headquartered in Toronto, such as BMO Capital Markets, continue to play an invaluable role in financing the mining industry and ensuring projects raise the capital required to keep progressing toward production. BMO has helped finance several notable projects in Ontario, including Argonaut Gold’s Magino gold project, where it was the sole bookrunner on a C$52 million offering that the company completed in March 2022. BMO was subsequently the top left bookrunner on a C$195 million offering by the company in July.
BMO has also worked with a couple of companies with future facing commodity projects: Frontier Lithium completed a C$10 million offering in November 2021 to finance exploration activities on its PAK lithium project, and Electra Battery Materials closed a C$10 million equity offering as part of a larger US$45 million financing package for a hydrometallurgical refinery the company is building in Ontario.
As a company situated in close proximity to a multitude of pivotal deals within the province, BMO's bullish perspective on the industry is a telling sign of its belief in the industry's exceptional potential for superior performance vis-à-vis other sectors. Ilan Bahar, managing director and co-head of global metals & mining at BMO Capital Markets, explained: “We feel more optimistic today about the macro trends for metals and mining than at any time since the 2005 to 2007 period… Now we are entering a phase where almost the entire planet wants to decarbonize, including moving to EVs, and all on the same timeline, implying that metal demand will be extraordinary,” he affirmed.
James McClements, co-founder and managing partner of Resource Capital Funds, one of the industry’s most prolific private equity investors, echoes Bahar’s sentiment that the current setup is advantageous for mining investors. “The thematics around what is driving our industry right now are as strong as I have seen in a long time,” McClements said, reflecting that the Chinese economic advancement drove demand during the previous bull cycle. Today, in addition to the burgeoning Chinese middle class acting as a tailwind for demand, there are additional relevant factors driving markets: “There are still billions of people that are on that same journey, lagging China, be it Indonesia, India or Africa. And, clearly, global decarbonization will have a large impact on demand for critical metals and minerals needed for electric vehicles, wind, solar,” he added.
That said, McClements’ view is that there are times when influences beyond the sector itself come to bear. “Rising interest rates and geopolitical concerns have dampened the overall market. In this regard, it is absolutely a good opportunity to invest because valuations are better than they were last year. I do not think this is reflective of what we think the next five to 10 years for the industry will be. I think this is a temporary pullback for our sector,” McClements explained.
“There are a lot of interesting gold deposits in Ontario, however, the question is: what is the capital intensity of the proposed gold operation, and how much capital is available for the operator?”
Spencer Cole, Chief Investment Officer, Vox Royalty Corp.
Flow-Through Financing
Undoubtedly one of the most encouraging policies intended to incentivize mining investment in Canada is its flow-through tax credit system. Toronto-based PearTree Securities is a leader in structuring these transactions, and is moving quickly to develop its financing capacity for deals related to critical metals. PearTree CEO Lisa Davis commented: “Traditionally in Canada the financing focus has been on precious metals, but the biggest story these past two years has been battery metals and other critical minerals. The introduction of the new 30% critical mineral exploration tax credit by the Canadian government has been a really important driver of flow-through financing and our overall business.”
Davis points out that the draft legislation that was released in spring of 2022 has already resulted in explorers and producers of critical minerals getting premium pricing for their flow-through share issuances, and the money is not all coming in from the usual suspects. “Our purchasers are often institutions with ESG considerations, which can sometimes write off mining. However, they are now starting to look at mining from the perspective of furthering clean technologies and the green economy. Critical minerals have also broadened the potential investor base at the back end of the structured arrangements we do,” she said.
Oberon Capital has also played an important role in developing Charity Flow-Through Financing as an advantageous way for Canadian and offshore companies to raise and deploy exploration risk capital in Canada. Oberon’s Charity Flow-Through Financing model acts as the nexus between Canadian taxpayers and investors globally, and the largest impact has been to globalize the supply of exploration risk capital. According to David LeClaire, president and founder of Oberon Capital: “Oberon connects its Canadian client’s interest in flow-through tax benefits with investors globally whose interest is to own the underlying company. These investors include large producers taking strategic positions to secure future reserves, metals and mining funds deploying capital, and sovereign investors seeking long-term supplies of critical minerals.”
In addition to the impact it has on boosting fundraising for Canadian charities, this form of financing also benefits remote communities and is well aligned with the economic objectives related to Northern development. “No one is drilling for gold in downtown Toronto, Montreal or Vancouver,” LeClaire proclaimed. “Charity Flow Through Financing brings more money for employment and greater resources for management to accomplish their goals in remote parts of Canada.”
ESG
The shift to electric vehicles and renewable power is utterly reliant on metals such as lithium, nickel and cobalt. So as China reopens and Joe Biden’s bumper green spending package boosts EV demand in the US, the boom in metal prices should be a win-win for sustainable investors. Nevertheless, mining supply chains are still riddled with environmental, social and governance risks that new disclosure frameworks are seeking to quantify. One of the inescapable realties for mining companies is that ESG performance and compliance are now inextricably linked with access to capital.
Recognizing the importance of a third party verification system that could be used by everyone, from regulators to rating agencies, as well as Wall Street and the companies themselves, Onyen Corporation has developed the software that eliminates friction around bringing together all the relevant ESG information a company needs to disclose. Their platform analyzes ESG data, and highlights potential issues, so companies can preemptively address problems before regulators and investors are alarmed. The software also helps companies better understand potential future risks by using scenario analysis to test how their approaches hold up under different climate change and time-based scenarios. This empowers companies to effectively plan to mitigate future ESG risks. “Our vision is to gather a community of small to mid-cap companies – and private companies of all sizes - to understand that this is not just about good corporate citizenship, it is about money. If companies wish to access capital, in any form, in order to thrive, they must disclose their ESG performance obligations to meet the investors’ acceptance requirements of their risk profile,” Onyen Corporation founder & CEO, Laurie M. Clark highlighted.
Another component of failure on the ESG front is that in down markets, governance issues can leave companies vulnerable to activist investors who seek to challenge a management team's strategy and dictate an outcome that might be counter to the company’s long-term interests. Kingsdale Advisors is a strategic shareholder advisory firm that assists companies when they are in difficult situations. Ian Robertson, CEO of Kingsdale Advisors, explained that companies can protect themselves against activists by appointing boards that look at their company from the perspective of an activist. “They should ask themselves where they are falling short. Usually with junior miners it is on the governance side of things. People care about governance because there is compelling evidence that says governance will impact share price and performance of the company. This entails making sure that there is diversity on your board, a compensation program that is in line with peers and matches the shareholder experience, and a succession plan in place,” he said.
The market may currently be navigating its way through a period of uncertainty, but jurisdictions such as Ontario with an active financial sector will be best positioned to weather any challenges market conditions may bring.
