Mining Finance and Investment
The financial pulse of the mining world
The high-interest rate environment seen in 2022 has continued into 2023, with the Bank of Canada’s key interest rate reaching a 22-year high of 5% in 2023 – a dramatic rise from the 0.25% rate of early 2022. Moreover, rising geopolitical tensions have further complicated financing. For example, in November 2022, the Canadian government asked three Chinese companies to sell their stakes in Toronto-listed lithium explorers following a national security review, a move that raised questions about the future of other Chinese investments in the Canadian critical minerals sector. Canada may stand to benefit in the long run from its efforts to overturn China’s dominance of critical minerals supply chains, however, Canadian policies limiting Chinese participation in its critical minerals sector may also create difficulties for local mining companies, particularly juniors, to fund projects.
While foreign investment from China comes with a lot of geopolitical baggage and scrutiny, Ontario’s prospectors have welcomed the influx of Australian investment, which, for some, has helped plug their funding gaps. “The Canadian markets have generally always led global finance, but recently we are seeing a lot of Australian investors and corporates in Ontario and elsewhere who are increasingly supportive of juniors when compared to their Canadian counterparts. I also think the Canadian banks have been overly restrictive of supporting investment into junior mining and energy, perhaps due to the influence of American investors nearby,” said Greg Ferron, president and CEO, PTX Metals Inc.
This reversal in fortune for issuers is a stark contrast from previous years, where many found that access to Canadian capital was relatively easier. “In the 1990s, Australian institutional investors showed reluctance to invest outside the country, making it challenging to raise capital for projects beyond Australia. To overcome this, we decided to relocate the company to Canada, anticipating easier access to capital,” said Ross Orr, president and CEO, BacTech Environmental.
In addition to the uncertainty around foreign institutional investment, retail investors seem to favor non-mining stocks. According to a report by Morgan Stanley, the most popular types of stocks traded by individual investors are those in the communication, technology, and consumer discretionary industries. Alexandre P. Boivin, CEO of Quimbaya Gold, shared his thoughts: “Mining companies are usually viewed as risky investments, but recently we have seen the more risk-tolerant investors investing in tech and crypto for example.”
The retreat of retail investors from the Canadian mining sector has added to the pressure felt by many juniors, forcing them to find innovative ways to lure back amateur investors who are unlikely to have the same levels of information, expertise, and resources at their disposal compared to their institutional counterparts. EarthLabs’ executive chair and CEO, Denis Laviolette, explained how his company is attempting to do just that: “We aim to build robust platforms to educate investors and help them navigate the mining and mineral exploration sector. Junior exploration is a fundamentally risky business, and it relies heavily on retail investors. There is a steep learning curve for new investors, with complex geological concepts and jargon. Our aim is to provide a one-stop shop to educate retail investors and move them up the learning curve.”
In addition to the mining industry’s poor reputation among retail investors, another frequent complaint from issuers is the rampant predatory short-selling that continues to plague the market – a controversial practice that is particularly pronounced in the Canadian junior mining sector. “For juniors, the impact of short selling is noteworthy, influencing share values and hindering fundraising efforts. Resolving these issues is vital for fostering a more robust and equitable mining landscape,” said Byron O'Connor, vice president - mining, Pinchin.
Some junior issuers have lodged complaints with the Canadian Investment Regulatory Organization and the Canadian Securities Administrators about predatory short-selling, in an attempt to clamp down on the practice, as was done recently in South Korea. “Short selling helps improve liquidity, so I think it needs to be maintained in some capacity. However, certain harmful practices like naked short-selling are endemic to our industry and must be addressed,” continued Laviolette.
G2 Goldfields' CEO Dan Noone is however optimistic: “Over time, I anticipate that investors will return to mining as they seek tangible assets and real value-creation opportunities. Junior exploration companies play a unique role in the investment landscape, catering to a niche segment characterized by higher risk and very high potential rewards.”
Despite the troublesome macroeconomic environment, Canadian mining companies, particularly Ontario-based ones, continue to make some of the largest capital expenditures in the world. In fact, National Resources Canada projected Canada’s capex in the mineral sector to rise by 21% to C$21.4 billion in 2023. Within Canada, Ontario was the biggest spender of any Canadian province and was responsible for 31% of Canadian mining capex in 2022, dwarfing Saskatchewan’s 21% and Québec’s 19% shares.
Toronto
In 2022, the TSX and TSXV maintained their positions as the world’s top mining and exploration listing venues, where 45% of the world’s total equity capital for mining was raised in 2022. The TMX Group, which runs these two exchanges, launched the TMX ESG Data Hub in October 2023 to provide a range of real-time and historical data concerning listed companies’ ESG performance. Dean McPherson, head of business development – global mining for TMX, shared: “We launched this platform in response to the needs of our investor clientele. ESG has become a key decision element in investors’ decision processes.”
The boom in IPO activity seen in 2020 and 2021 is behind us, and Canadian IPO activity in 2023 has been minuscule compared to past years. There were 12 Canadian mining IPOs in H1 2023, 11 of which were on the Canadian Securities Exchange, resulting in gross proceeds of C$157 million. There were, however, two significant new mining listings on the TSX: Lithium Royalty Corp (LRC) and Allied Gold, with LRC’s C$150 million IPO accounting for 95% of the total mining IPO amount for H1 2023. “In a very challenging market, through the IPO Allied Gold, which is focused on West Africa, raised close to C$300 million this summer. In the past, we saw London as the main competition for African companies. Allied Gold’s decision to list on the TSX instead of in London underscores Toronto’s position as a leader on the global stage,” said McPherson.
“The primary barrier for small-cap Canadian companies aiming to access the US shareholder base is the inherent size difference, as a small cap in Canada may be considered a nano-cap in the US and may therefore be overlooked.”
Stephen Coates, Founder and CEO, Grove Corporate Services
Windows of opportunity
Timing is crucial for juniors seeking equity financing on the big exchanges. Windows of opportunity for IPOs can close as rapidly as they open. Dean McPherson shared his advice for juniors: “Nowadays, the periods of positive listing environments have been reduced from years to months. In such conditions, I would advise companies to ‘get their ducks in a row’ and ensure they are ready to list on short notice, not wasting precious time on administrative tasks when the right window of opportunity appears.”
McPherson’s comments come as the administrative burden on prospective Canadian issuers may be about to increase. The International Financial Reporting Standards (IFRS) Foundation, a non-profit responsible for developing global accounting and sustainability disclosure standards, recently released new disclosure standards. It is yet to be seen if the Canadian securities regulators will adopt some or all of these new standards that state that companies should release their sustainability information at the same time as their financial information. Heather Cheeseman, partner and national mining leader at KPMG in Canada, explained how this may pose problems: “To date, most mining companies put out a sustainability report, but typically at a much later date than their financial information. Aligning these two processes will be a significant undertaking for companies as there is limited capacity within companies to obtain, review and consolidate all the information needed to meet these new disclosure requirements; it is a time-consuming process.”
Even though the conditions have not been ideal for new listings, Toronto-based law firms like Ormston List Frawley LLP (OLF) have been advising their mining clients, preparing them for when the next window opens. Denis Frawley, a partner at OLF, had this advice for juniors: “Companies need to ensure that their property ownership rights are clearly established and that they have satisfied their obligations under the agreements or laws whereby they acquired those projects. I would also urge that companies periodically refresh the geological data on their properties so that they are not relying on outdated information when embarking on a transaction.”
Streaming and royalties
Traditional financing options such as equity and debt are not always sufficient to meet the needs of mining companies. As a result, alternative financing has become increasingly popular. This can include a range of financial instruments such as streaming and royalties that provide miners with access to capital while minimizing dilution and reducing risk.
The world’s largest lithium-focused royalty company, Lithium Royalty Corp, made the biggest Canadian IPO of the year. LRC has 33 lithium royalties, including four in Ontario. “Since the IPO, we have acquired six new royalties, including a 2% gross overriding royalty (GOR) from Power Metals on their Case Lake project in Ontario, where they are finding great lithium intercepts close to the surface and are hoping to have a mineral resource in 2024,” said Ernie Ortiz, LRC's president and CEO.
Ortiz believes royalties can fill the gap during times like these: “A key selling point of the royalty model is its non-dilutive nature. Valuations across the commodity space are fairly depressed, and this valuation mismatch presents a good opportunity for royalty investments as the issuer can then preserve their equity capital and prevent any equity dilution.”
Electric Royalties is another Canadian company that has been snapping up royalties in Ontario’s battery mineral projects, owning royalties in projects operated by companies like Northern Graphite and Green Technology Metals. Electric Royalties’ CEO, Brendan Yurik, explained the strategy behind these acquisitions: “We see Ontario as a favorable place for critical metals and for lithium in particular. Mining in Ontario is remote, but operations are close enough to infrastructure to transport the materials where they need to go. There is also access to renewable energy; hydropower is readily available due to the province’s abundant lakes and rivers.”
Although there is yet to be a single producing lithium mine in Ontario, financiers like Electric Royalties are playing the long game – confident in the fact that Ontario will maintain its trajectory of building a local EV supply chain and the billions being poured into battery and EV plants will result in strong demand for locally sourced lithium. “We see at least a two-decade runway in this space. The growth profile for the clean energy industry is huge; it is forecast to become five times bigger than the mining sector within the next 20 years as it overtakes fossil fuel energy generation,” continued Yurik.
Triple Flag Precious Metals Corp (Triple Flag), another Toronto-based streaming and royalties company, has opted to focus on precious metals. For established financiers like Triple Flag, global economic uncertainty can bring opportunity, as issuers look away from traditional equity markets where raising funds has become increasingly costly. “Interest rates have also remained elevated, and therefore debt has been expensive to service and has stressed the liquidity of smaller companies. We observed that even if issuers can raise equity capital, it is extremely dilutive,” shared Shaun Usmar, founder and CEO, Triple Flag.
Many mining projects fail to be completed on time and within budget, and shareholders can be quick to jump ship at the first sign of bad news. Since bringing a mine to production can take upwards of 15 years, many argue that investors should be prepared to wait a while if they want their investment to bear fruit. “Project delays due to permitting and other factors put stress on companies’ liquidity and balance sheets. With stream financing, we share the risk like an equity shareholder – if they do not produce, we do not get paid,” Usmar continued.
In 2010, the mining sector made up 25% of the total value of the TSX and the TSXV, more than any other industry. That year, juniors on the TSXV were able to raise C$5.3 billion. As of October 2023, they had raised less than half of that, and the sector’s composition of the TSX and TSXV has fallen to 13%. In the face of such strong headwinds, Ontario’s exploration and mining companies can only focus on what is under their control and ready themselves for the next window of opportunity. For those who cannot wait, there is no better place to be, as Ontario’s capital Toronto boasts the world’s best mining finance ecosystem, where a breadth of alternative financing and support can be found on a company’s doorstep.
“Mining companies are usually viewed as risky investments, but recently we have seen the more risk-tolerant investors investing in tech and crypto for example.”
Alexandre P. Boivin, CEO, Quimbaya Gold
Alternative minimum tax
Ontario is renowned for its flow-through share tax credit that has helped finance local prospectors and miners for years. First introduced in the 1970s to incentivize and promote local exploration investment, the flow-through share regime has grown in popularity to become a staple of junior mining finance. The Ontario Focused Flow-Through Share (OFFTS) tax credit provides eligible individual shareholders with a refundable tax credit of 5% of eligible Ontario exploration expenses estimated to reduce the after-tax cost of a C$1,000 investment in exploration by C$375-625 for Ontario investors. Since 2011, 60% of mines that opened in Ontario were explored by junior exploration companies using OFFTS, leading to C$4.3 billion in mine construction capital costs, according to the provincial government.
Companies of all sizes have been able to leverage the OFFTS, and it has proven massively beneficial in enticing investors during the dips in commodity cycles. The generous OFFTS regime has attracted prospectors from the other side of the world, such as Aston Minerals, an Australian company focusing on their flagship Edleston nickel project south of Timmins. “Originally, when drilling for gold, we drilled over the fault and discovered nickel. The company raised A$29.25 million in March 2022. With flow-through funding we drilled 28,000 m on the nickel deposit,” said Russell Bradford, managing director, Aston Minerals.
However, all of this may be about to change. Proposed amendments to the alternative minimum tax (AMT) regime for high-income individuals were introduced in the 2023 federal budget, and are likely to have a significant impact on flow-through share investment, and thus the exploration financing space. The proposed AMT changes are complex, but in summary, the result would be a steep decrease in the efficacy and benefit of the OFFTS regime.
Issuers and investors have been preparing for the impending change to the beloved flow-through model. David LeClaire, president and founder of Oberon Capital, a firm that facilitates flow-through donation financing, observed how this shift is already unfolding: “The proposed AMT changes will reduce our clients' capacity to make donations and take advantage of the existing structure by up to a third. While these changes may have a notable impact on the availability of exploration risk capital, we observed many issuers coming to the market in 2023 to pre-fund some of their 2024 needs. This was driven by both the perceived reduction in demand from our clients and the anticipation of the forthcoming AMT changes.”
Industry organizations, issuers, investors, and companies that facilitate flow-through deals have all actively lobbied the government to reconsider the proposed AMT amendments. “PDAC is also calling for Finance Canada to change the tax treatment of flow-through shares to appeal and spur investment from a broader base of Canadians. Our recommendation to base capital gains on the issue price of a flow-through share aims to counteract a proposed increase to the AMT announced in Budget 2023, which if enacted, will no doubt create a headwind for flow-through investments in Canadian projects,” said Raymond Goldie, president, PDAC.
The charitable community, mainly composed of high net-worth donors, are a large part of the flow-through financing space for mineral exploration, and will also be impacted by the AMT changes. “The charitable community, facing similar concerns, has become more organized and vocal recently; and is now actively engaging on the issue. However, due to the complexity, many stakeholders are coming to the table somewhat late,” said Lisa Davis, CEO, PearTree Securities.
Experts forecast a substantial reduction — approximately a third — in funding for exploration projects through charitable flow-through deals. “We are currently navigating a complex landscape where the possibility of a 30% reduction in purchases from our primary buyers, individuals earning between C$1-10 million a year, looms large,” said Peter Nicholson, founder and president, Wealth Group (WCPD Inc).
This all comes at a time when working and middle-class people are battling to contend with inflation and are less likely to have spare change for investments or donations. "The Canadian middle class is donating less and less, with a peak in donations in 2006,” continued Nicholson.
“Mining is a natural hedge to a lot of the chaos we see in the markets today, but the caveat is that it does not offer enough liquidity for larger cap institutions.”
Denis Laviolette, Executive Chair and CEO, EarthLabs
The potential seismic shift in Ontario’s mineral exploration financing space appears to have gone unnoticed by many – perhaps due to the complexity of the flow-through model and the Canadian tax code. For those involved in flow-through financing, 2023 was spent blowing the whistle to get the industry’s attention on the matter. “Our ongoing challenge is to address misunderstandings and educate issuers, clients, and end buyers, often through the brokerage community,” said LeClaire.
To complicate matters, the government’s position on exactly how and when the proposed AMT amendments will take effect has been unclear. “The government's hesitation in finalizing the rules adds an additional layer of uncertainty, with the proposed changes set to take effect on January 1st, 2024, leaving stakeholders in a challenging position, given the potential for retroactive implementation,” said Davis.
It remains to see how the AMT will impact the flow-through mechanism throughout 2024. After 40 years of bringing essential exploration risk capital to Ontario, the flow-through model might never be the same again.
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