How would you assess the financing environment for juniors today? Are you seeing capital migrate to more stable jurisdictions like Québec?
It is clear that mining investors prefer safer distinctions. People typically view Canada and Australia as the best countries to invest in mining, but within Canada, Québec is one of the leading provinces attracting capital. Commodity prices also have a big impact on the ability of the junior sector to raise capital. The financing environment has been drawn to the gold sector since 2020, but since the beginning of 2021, the base metal sector has been in high demand from investors. Battery materials are also attracting a lot of investor interest. However, for certain battery materials like graphite or lithium for example you need to do more investor education to attract capital, because investors are not as familiar with these commodities.
What are the biggest challenges associated with financing the battery material supply chain?
The sheer scale of capital is one, especially if we want to invest in second transformation of certain materials and go further down the supply chain. There is huge support from government, but what outside investors want to see is that the local financial institutions are also supportive of mining companies investing in the energy transition. The third challenge is that battery material technology is evolving, and investors looking at making investment decisions face uncertainty around the technologies that are going to govern the energy transition. We do not know for sure what is going to be the dominant battery chemistry in 10-15 years.
What are your views on the M&A environment in Québec?
What we have seen over the last few years is a focus on consolidation M&A. Commodity valuation is less important in these cases, but it is the relative valuation between two businesses that matters. If someone is looking to acquire a copper company or project, they are going to think about it twice because prices are currently elevated along with valuations, and buyers are conscious of that. We see the M&A environment as healthy but not exuberant.
There has been much more M&A in the gold sector, where companies have merged in order to grow in size so they can have more diversified portfolio of mines. Their shares are more liquid and thus are more relevant to investors. What you see with the big mining companies is that they have been extremely disciplined, and they have done very little large scale M&A in recent years. Part of the reason for this is capital allocation: investors have been largely advocating for more return of cash to shareholders. The other reason is that it is not obvious to find opportunities that make any difference to their business.
To what extent have alternatives like cryptocurrency and precious metals ETF’s shifted the flow of funds away from juniors?
If you look over the past decade in North America, the precious metal focused investment funds in most years have seen redemptions. There was a bit of an inflow in 2020, but it was not sufficient to fully compensate for redemptions in previous years. Therefore, there are increasingly less specialist precious metals investors around, and they have fewer dollars to invest. These are the investors that typically invest in smaller gold companies. Consequently, mining companies have to be larger and their shares more liquid so they can be interesting enough to attract generalist investors. Another thing that is very important has been the continued growth of gold ETFs. If you want exposure to gold, you do not need to buy a junior mining company with one project that may or may not be in production, you can buy a gold ETF or you can buy a large miner like Barrick Gold.
Why should companies look to partner with BMO when exploring financing or M&A options?
BMO has some of the best credentials in the mining industry, both in terms of financing and M&A. Secondly, if you are working with a large financial institution that serves a number of industries, it is important to work with an institution that is committed to your industry. For BMO, metals and mining is its core, and is one of the most important industries that we provide services to. We have been committed to financing the mining industry for 100 years and I do not see that changing.