Québec’s Investment Outlook
La Belle Province leads Canadian mining finance
In an industry as capital intensive as mining, a multitude of factors must amalgamate to move from exploration to production. Good geology is universally important, and Québec is blessed with it in abundance. However, in today’s era, the sociology often outweighs the geology. A well-funded asset in the hands of the wrong management team can easily be worth zero, while simultaneously, that asset can be worth 10-100x if the team knows how to effectively navigate the hurdles that inevitably come along.
Financial snags can come from a variety of angles: poor community relations, lack of ESG compliance, poor capital structure, and cyclical downturns can all drive investors away and stymie project development.
Thanks to the structure of its laws, incentives and support for mining along with its wealth of talent, in Québec these hurdles tend to be far lower than in other jurisdictions around the world. Consequently, funding follows. According to Funding Portal, Québec accounted for 36% of Canada’s mining finance dollars. This outpaces every other province including Ontario with 29% and British Columbia with 21%.
Despite the willingness to fund exploration and development projects relative to other jurisdictions, the past decade has nonetheless proven challenging for juniors across the board. With respect to precious metals funding, Pascal Lussier Duquette, director of investment banking-metals & mining at BMO Capital Markets pointed out that, over the past decade, precious metal focused funds have seen redemptions in most years. Inflows were positive in 2020, but still not sufficient to fully compensate for redemptions in previous years. “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,” he said.
SIDEX’s Paul Carmel echoed that sentiment, highlighting that although the pricing environment for many commodities has improved over the past year, the logic of rising prices leading to increased fundraising is not that simple. “Even though prices are higher, the discovery ratios are lower from an exploration standpoint. When you go into the producers, their track record of delivering what they promised over the last several decades has not been great either. Prices are higher, but many investors remain apprehensive about the mining sector because there has been a lot of disappointment on the discovery, production and ESG side of things” Carmel affirmed.
A strong set up
A compelling argument can be made that the sentiment for commodities across the board is bullish moving forward. In response to the softening in prices over summer, Goldman Sachs’ head of commodities research Jeff Currie told investors: “The only thing that can fight real physical inflation is rate hikes, not talk of rate hikes. The bullish commodity thesis is neither about inflation risks nor Fed forward guidance. It is about scarcity and strong physical demand.”
Chad Williams, chairman & founder of Red Cloud Mining Capital was also not discouraged by the summer correction. His view is that mining is cyclical, and the cooling off period is understandable given the extent of the bounce off of Covid induced lows. “This can be in part attributed to seasonal lull and a digestion period, because some small junior stocks have gone up tenfold,” Williams hypothesized. “I anticipate that over the next six to 12 months there will be a flurry of exploration news, because there is a lag between when capital is injected into a business and when companies are able to deploy that capital.”
Deal making powers on
For Lavery, a Montréal-based law firm that advises miners on mergers and acquisitions, and coordinates due diligence reviews in connection with financings, the overall health of the market has been stronger than many might have anticipated. Josianne Beaudry, a partner at Lavery, observed: “As long as metal price are strong, transactions are more compelling. Although we believed at the start of the pandemic that there would be less transactions and that people would prefer to remain prudent, we have seen a more active market than we expected.”
Fellow Lavery partner René Branchaud added that the fertile M&A environment in the province has kept them busy as ever from a workload standpoint. “We have been involved in several acquisitions of either companies or properties over the past year or two. This trend is continuing, with a lot of US and multinational corporations acquiring projects or mining companies in Québec.”
At Fasken, another law firm present in Québec, Frank Mariage witnessed a powerful shift from widespread uncertainty when the pandemic initially hit in Spring 2020, to where we are today. According to Mariage, many of Fasken’s clients had transactions related to gold that were subject to concurrent financings and they were unsure whether to cancel or postpone them. “I had to request extensions for those deals, and four months later, these deals were not only being closed, but they were over-subscribed in terms of the concurrent finance.” Mariage continued: “This gives an idea of the shift that happened in 2020: suddenly, a huge amount of capital started flowing into mining and gold played an important part in this. It started with gold, but now we are also closing financings for other elements such as lithium and graphite, which we did not see before.”
One of the trends in Québec and the world is that the “easy money” has been made. The big challenge for companies right now is that the deposits they are finding are lower grade, deeper, harder to find and more complex. Companies have to spend more money to explore, and often spending more money and hitting a lot less. Companies must therefore consider a variety of different avenues to finance a project. Alternatively, they can look to less hospitable jurisdictions, but in the current context there is a clear preference toward geopolitically stable areas. “Post Covid, geopolitical risk is even more of a concern,” said Sandeep Singh, president & CEO of Osisko Gold Royalties (OGR), which holds a 5% royalty on the Canadian Malartic mine, which is the most valuable royalty in the gold sector.
Singh, who took over OGR in January 2020, suggested that the royalty model is one that can be hugely beneficial to the industry. “We are coming into a period where there is more capital available, and equity markets are more open, but when you look back, there are always periods of time when that is not the case.”
He explained that the industry just exited a long stretch where equity markets were relatively closed to most companies, particularly those in dire need of capital. Through that period, the royalty sector played an important role in providing capital to help advance assets. The benefit of financing via a royalty company is that the money is only repaid when the mine does well. This differs from debt, which can be a burden if a company is starting up an asset. “A royalty or stream is leveraged over the life of mine. It is spread out a bit more, and we only do well when the miner does well. There is a closer correlation to risk for us and the operator than there is on the debt side,” Singh explained.
The other benefit for operators is that there is a value arbitrage that can be shared between the miner and the Royalty business. “Royalty companies trade at higher multiples, hence we can raise money cheaper as we have a lower cost of capital. If we can share some of that low cost of capital with a company then it may prevent them from having to issue equity at the wrong time resulting in excessive dilution,” concluded Singh.
Image courtesy of Mark Olivier on Unsplash