Slow, volatile recovery under way; exploration interest remains limited
Junior miner Novo Resources (CSE: NVO) checks all the boxes: It’s led by a well-known, connected and respected geologist; it has several prospective gold projects (one of which has an inferred resource) in the low-risk jurisdiction of Australia; it has a tight share structure and supportive shareholders (including Newmont Mining [NYSE: NEM], which bought a 35.7% stake in the junior last year); and it has managed to deliver both positive news and an increasing share price over the past three tumultuous years.
But the next time Novo needs its next infusion of cash, company president and CEO Quinton Hennigh won’t be looking to the equity market. “I’m looking at alternative means,” he said in late April. “I can’t speak too much about it at the moment, but we have two opportunities that could actually bring money into the treasury without having to raise equity.”
The company won’t need to raise cash until 2015 — it has $10 million in cash and only plans to spend $4.5-5 million this year. But three years into the current mining downturn, it’s telling that Hennigh, who last led Novo to the market for an equity financing in December 2012 and who released an initial inferred resource of 8.9 million tonnes grading 1.47 grams gold per tonne at the Beatons Creek project last year, is seeking to avoid the equity market.
“The times are just absolutely terrible right now,” Hennigh says. “I’d say this is akin to a depression in the mining sector. And it’s not just juniors — look at the majors, they’re having a very hard time right now.”
Financing remains tough across the mining sector, confirms Michael Faralla, head of global mining and a managing director at TD Securities.
“We’re starting to see some early signs that some companies have some access to capital, but I would say it’s by no means widespread and by no means very deep in terms of there being a lot of capital available,” he said in May.
In the first quarter of 2014, there was a resurgence in mining financings —in particular large bought deals for producing or development-stage gold companies in North America. Detour Gold [TSX: DGC], Torex Gold Resources [TSX: TXG] and Rubicon Minerals [TSX: RMX; NYSE-MKT: RBY] all closed bought deals of over $100 million each.
Those deals and about a dozen smaller ones fed optimism that the mining sector was seeing a turnaround, but that optimism has since dissipated. Mining financings fell from $400 million in February and $609 million in March to only $151 million in April.
“There was a period of stability in the equity markets (in January and February) and a strongly recovering gold price that supported that,” Faralla says. “After the end of February, that market window effectively closed again.”
While there is little appetite for exploration plays, the market has improved since last year.
Joe Mazumdar, a senior mining analyst at Canaccord Genuity, says the trends in financings, performance and insider trading in the junior mining sector have all been positive this year.
Moreover, although the industry is in a recovery, it’s going to be a slow and unpredictable climb up.
“This has been a U-shaped recovery if anything,” he said in an interview in May, noting that the TSX Venture Exchange bottomed last June.
“I think the U flattened around June 2013 — we’re on the other side of it, but this U is a volatile line. That volatility will continue, but I must say that the GDXJ (Market Vectors Junior Gold Miners ETF), which we use as our benchmark for juniors, has far outperformed gold. So there is this pent-up demand and people are looking for leverage.”
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