Toronto may be the global epicenter of mining finance, but even Canadian investors – long lauded for their knowledge of the risks associated with the mining industry – have grown wary of investing in the sector. Mining companies have been amongst the worst performers on the Toronto Stock Exchange (TSX) and the Toronto Venture Exchange (TSX-V). For the first time in many years, the first quarter of 2013 did not feature a single mining IPO.
With fewer companies listed and less capital raised, the TMX Group, owner of the TSX and TSX-V, decided to utilize its global reach to access investors outside of Toronto. The Group recently signed an agreement with the Santiago Stock Exchange to create a new venture exchange in Chile that allows TSX-V listed companies to list on its Latin American counterpart and tap into the investor base in South America.
“Our unique two-tier exchange system is at the core of our value proposition and differentiates us from other markets. In Santiago’s case, both the government and the exchange really liked the two-tier model. Many of our Canadian issuers are doing business in Latin America and it seemed like a natural extension of our capabilities for us to be involved,” explained Kevan Cowan, president, TSX Markets and group head of equities.
Closer to home, the TSX eased its rules to allow companies to raise capital at less than $0.05 a share, while the federal government extended mineral exploration tax credit for another year. However, according to Denis Frawley, partner at Ormston List Frawley LLP, these measures are not enough to tackle the funding issue. “The industry expected the tax credit to be extended due to the current financial situations, and the pricing policy has not led to a strong influx of capital on the TSX,” he said.
The lack of traditional forms of capital has led mining companies to look at other forms of financing for their projects. Royalty deals have become more attractive to near-production companies looking to raise money to fund construction. Sandspring Resources and Rubicon Minerals Corp. both landed multi-million dollar deals with streaming companies Silver Wheaton and Royal Gold Inc., respectively.
Rubicon Minerals evaluated several options, including equity and debt financing, for their Phoenix Gold project. When they were unable to find a suitable offer, the company turned to a $75 million royalty deal with Royal Gold. “Having the backing of a major royalty company like Royal Gold gives us additional security. The streaming deal was well received by the markets, and the share price appreciated once more investors became interested in the company,” said Rubicon’s CEO, Michael Lalonde. The streaming deal subsequently led to a $100 million bought deal financing.
While royalty companies are in a good position to capitalize on the lack of traditional forms of available capital, even Franco-Nevada Corp.’s president and CEO David Harquail acknowledges that mining companies would prefer to raise money in the traditional manner. “We represent the area of growth now for the gold industry – there is no question about that,” he said. “Companies such as Franco-Nevada are the go-to space right now for gold miners; most probably, mining companies would prefer to raise money in the traditional way, through equity-bought deals, but it is a tough financing environment for them out there at the moment.”
Shares of metal streaming and royalty companies are up well above those of producers, who have sold their profit margins. However, there are strong feelings in Toronto’s mining community against selling a royalty at the bottom end of a market. “Streaming and royalties are permanent and an enormously expensive way of financing,” said Rob McEwen, CEO of McEwen Mining. Eric Sprott is even firmer in his take on royalty deals. “The most opportunistic deal a company can do at the low end of the gold market is a royalty deal. Sprott (the company) offered a line of credit to a gold-producing company who instead signed a royalty deal, so there are indeed other forms of financing available besides royalties.”
Private equity in a Canadian mining context
A combination of undervalued assets and the promise of high returns means that private equity firms are taking a closer look at the mining industry. In 2013, the estimated amount of private capital raised was over $10 billion to be directed at the mining sector, yet few deals of significance occurred. While private equity firms are slowly learning about the risks and rewards of the mining industry, mining companies often perceive private equity funds as debt providers, according to David Thomas, managing director of mining-focused private equity firm Resource Capital Funds (RCF). Another misconception is that private equity funds are vulture funds. “In reality, we are looking for good assets managed by talented teams that have the ability to shepherd projects through the various stages of development,” said Thomas.
RCF has made investments in Noront Resources and First Nickel in Ontario, and David Thomas sits on Noront’s board of directors. This type of hands-on involvement on a management level is characteristic of private equity investments. Waterton Global Resource Management, a Toronto-based private equity firm, dedicates a significant amount of time and capital to developing a mining asset. The company recently raised $1 billion for a fund designed to invest in precious metals. “When we set out in June 2013 to establish the fund, our target was $750 million; however we quickly saw that high quality investors from around the world were coming to us as the mining space continued to worsen, making the opportunity set larger,” said Isser Elishis, managing partner and CIO of Waterton.
With a $1 billion fund in hand, the industry may expect to see a number of investments, but Isser Elishis countered the idea that there are currently a lot of quality assets available at distressed prices. “When it comes to booms and busts for commodity prices, many companies end up cutting back on development and high grading their assets,” said Elishis. “When we look at what has happened over the last two years in the market, the valuation of a company relative to where it sits today is not distressed.” Private equity may eventually become an important element in financing mining projects in Ontario, but there are some improvements that need to take place in the regulatory framework and on the infrastructure side to unlock the true value of some of the deposits, according to Ben Gibbons, vice president, corporate finance at accounting firm Collins Barrow Toronto LLP. “While there are a number of significant assets, what is lacking are the infrastructure solutions that enable companies to leverage them economically. Once these problems are solved, private equity participants will gain interest in the market.”
Michael White, president of Toronto-based financial house IBK Capital, believes Ontario has allowed its collective passion for producing metals to wane over the last hundred years. “The province was a frontier for metals and mine development – we wrote the book on many different mining techniques and have built up service industries around that, all the way up to our capital markets, which were founded on mining,” he said. “Many Ontarians do not understand the significance of this.”
This article was written as part of research conducted for GBR’s upcoming report on the mining industry in Canada’s Ontario Province, which will be published in Engineering & Mining Journal in July 2014. To participate in this report, please contact Gabrielle Morin at gmorin@gbreports.com.
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