Between boom and bust – by Phil Hopwood (Lawyers Weekly – April 17 2015)

Cutting red tape just one of the ways to help junior miners raise money in hard times

I always say you can tell you’re at the peak of the market when your cab driver starts offering you stock tips. Likewise, I now say you can probably tell you’re at the bottom of the market when mining companies start transforming themselves into medical marijuana producers.

That may sound strange, but it’s true: Canadian mining companies have grown weary of lacklustre returns and are looking to other sectors that hold out greater promise. It just goes to show how very challenging the mining market has become, especially for the juniors.

Heavily responsible for exploration and discovery of new deposits, junior miners are the foundation of the industry’s food chain, often selling their new discoveries to larger developers before starting the cycle all over again. But after years of being battered in a bear market, juniors are struggling to keep the lights on, cutting back on exploratory costs in the past year by 29 per cent — on top of a 39 per cent cut the year before.

Given the time it takes from exploration to development to production, we are headed for serious supply shortages in key minerals and metals in the next decade if this trend continues. To compound the problem, investors have already been taking note of the poor returns from mining stocks and are leery of the sector. Gone are the days of Chinese investors financing large capital projects, while banks rarely offer favourable terms anymore.

Amid the tough times, juniors can take action and buck the trend. Making savvy choices can mean the difference between boom and bust.

But first, junior miners must adapt to some new realities. One Canadian mining analyst estimates nearly half of Canadian juniors have negative working capital. Juniors need cash, and the traditional sources aren’t there. Miners should look to foreign investment, but set their sights past China. Sovereign wealth funds in the Middle East, for instance, potentially represent an untapped source of investment. How many miners spend time making connections in this region?

Otherwise lacking access to traditional funding, juniors should also look to other alternatives such as private equity, which has been quietly eyeing the sector. Still other alternative financing options may also be possible: miners could explore royalty streaming arrangements, equipment financing or high-yield debt. Juniors should also look to pool resources, share infrastructure, and partner to develop projects.

While the onus remains on juniors to help themselves, a boost from the government could go a long way to improving the health of this industry. Globally, governments have started to change their approach to mining. Rather than simply seeing the sector as a source of tax revenue, they are increasingly recognizing mining for its widespread economic and employment benefits, and are looking to attract business.

Mining, after all, is a global industry, and minerals found in Canada are widely found elsewhere. Producers gravitate toward favourable markets, so from a Canadian perspective a key question to ask regards what provincial and federal resources leaders are doing to make investors choose Canada as the place in which to invest. While Canada has many attractive qualities for international mining companies — notably the stable political climate and skilled workforce — the unfortunate question raised regularly is: “how much is investment here hampered by red tape?”

In many ways, Canada appears more a political than economic union. Provincial and federal laws and regulations differ between provinces, and companies must find ways to navigate through them. Developing mineral rights on First Nations territory presents a set of challenges unique to our country. All told, a single mining project may require engagement with three separate levels of regulatory and stakeholder communities, with competing interests likely in each.

Junior miners find themselves particularly challenged by red tape, as cost-cutting has left them with fewer resources to deal with regulatory and stakeholder expectations. There is a real and measurable cost to regulatory compliance, and for some junior miners the cost is too great.

Mining has already become a leading industry that is critical to the economic health of Canada, contributing over $60 billion a year to Canada’s economy and more than $7 billion in taxes and royalties. For the industry to continue generating employment, federal and provincial governments could possibly be helping more specifically around engaging industry stakeholders. For instance, working with First Nations, who own a wealth of mineral rights, can be complicated — especially for juniors, who are called that for very good reason: they are small and lean. Federal and provincial governments, who are more experienced in negotiating with First Nations, should support mutually beneficial outcomes for all industry stakeholders.

Much of Canada’s great mineral wealth could remain untapped if red tape stands in the way of attracting greater investment.

Phil Hopwood is a partner in Deloitte’s consulting practice, where he leads the Canadian and the global mining groups. He can be reached at

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