Canada’s capex raising credentials remain a siren call for mine developers

For more than a century, Canada has been the global leader in capital formation for the mineral exploration and development industry. However, in the wake of modern demand for niche technology minerals, a general underperformance in mining equities and dwindling investor interest, the mining finance sector needs to innovate to help keep its participants engaged and keep them from considering listings elsewhere.

During The Northern Miner’s recent Global Mining Symposium, industry veteran Ian Telfer said Canada had a strong track record of conducting mine finance based on a proud history of discovery success. It had prompted investors to develop a penchant for high-risk investments.

“This really started with some of the bigger deposits found 100 years ago in Kirkland Lake and in parts of British Columbia that showed the world that Canada had the resources and the expertise to develop these deposits and create value for shareholders and employees,” he said.

“And from then it went on to become very much a Vancouver-based junior market that was very successful in the 1960s and 70s, and 80s and 90s, raising money for junior companies. And it was this willingness to put up money at high risk that differentiated Canada as a source for funding.”

Telfer added that events such as the Bre-X scandal of the 1990s helped refine the market by improving regulations forcing the companies to become more responsible. “Corporate governance is a much bigger issue now, and so, I hope that Bre-X-type scandals are behind us,” said Telfer.

With over three decades of gold industry experience, Telfer pointed to one of the perennial problems goldbugs face. Over the long term, gold shares don’t outperform the regular stock market.

“The challenge for the gold mining industry, because of the fluctuations in the gold price, is that the share price of most gold majors had barely moved up or down over the past 20 years,” said Telfer.

“And that has discouraged investors worldwide, especially from the large capital pools in the United States, from investing in the gold industry. On the junior side, as Silicon Valley continues to show us, the thing you need is success stories.”

“Nothing makes people invest quicker than if their brother-in-law or their next-door neighbour just made a killing in a gold stock,” said Telfer.

He lamented that one of the biggest challenges to capital formation over the past decade was the few exploration success stories that led to a rocketing share price.

“And so, people are increasingly nervous about risking the money because they haven’t heard a success story in a while. The combination of long-term mediocre returns for the majors and the lack of success stories for the juniors, I think, are putting us in the market we’re in right now,” said Telfer.

He likened the situation to the age-old chicken-and-egg conundrum. “A success story will lead to the capital, and capital will lead to a success story. And I think it will have to be a discovery success that kicks everything off.”

Trading liquidity

Telfer’s comments beg the question, what are some ways of improving capital formation?

Jos Schmitt, president and CEO of the NEO Group of companies, thinks he has the answer.

He agreed with Telfer that there was a discontinuity between Canada’s great mining legacy and the missing success stories today.

In his view, the quality of many of the mining companies has been deteriorating. “I think that the traditional exchanges have played a role in this,” he said during the GMS.

“And, when I talk about deteriorating quality, that refers largely to the criteria that you need to follow to go public on venture exchanges, which in my eyes, are not sufficient. And if we could bring that standard up, bring that up more to a level of senior exchanges, I think that will inspire more investor confidence,” Schmitt said.

He also contends that this is partly why companies listed on venture exchanges don’t see the stocks being marketable. “There’s a reason why they’re not included in global benchmarks.”

A second reason he puts forward for declining investor confidence is that the exchanges have “lost their mojo a bit.” In Canada, companies and exchanges started to focus much more on maximizing shareholder value than how to maximize the service to the issuer’s core constituents, capital raisers and investors.

“And I think an exchange can play a vital role in helping companies understand liquidity, help them with investor awareness, and help them maximize access to trading. And why is this very important? Think about when you do your initial raise and you go public, you’re going to need more. It’s not going to stop with one raise, you’re going to do a secondary one.

“And if your stock is not liquid, it will lead to capital dilution. A liquid stock, a stock that is doing well, will also be able much more rapidly to start benefiting from your listings in other places in the world to get access to more capital,” said Schmitt.

Schmitt said traditional exchanges were the venues where some of the greatest evils of industry investment thrived, tarnishing capital markets including pump and dump schemes, predatory short selling, and naked short selling.

“These are three phenomena that are still omnipresent in our market. And they don’t help us build investor confidence in the industry,” said Schmitt.

“When I talk with some of the large investors in Europe or the U.S., they are aware of this. We must tackle this. We have to address this because it’s bad for the company. It’s bad for the investor and bad for the shareholder.”

Schmitt added that there were several global capital pools that the mining industry was not tapping. For this reason, the NEO Exchange is midst in being acquired by the Chicago-based exchange company Cboe Global Markets Inc. for an undisclosed amount.

“By combining NEO with a US$14 billion global exchange group based in the U.S., we’re going to look at new ways to provide issuers with global exposure and trading liquidity,” said Schmitt.

Juniors lead growth

Meanwhile, the head of global mining t the TMX Group in Toronto, Dean McPherson, tells The Northern Miner it has enjoyed considerable success on the junior venture exchange.

The group recently released its 2022 Venture 50 list, in which junior mining issuers featured prominently.

Of the five industry sectors, mining companies had the highest average share price increase of about 572% and a market cap increase of nearly 1,000%. The majority of mining companies on the 2022 Venture 50 list focus on lithium and battery metals.

“The list is representative of the growth and evolution of the early-stage company ecosystem in Canada. Over the past year, the 2022 Venture 50 companies created $13.6 billion of market capitalization and had an average share price appreciation of 293%,” he tells The Northern Miner in an interview.

The exchange’s major advantage lies precisely in its long history of successfully attracting the capital global miners need. “Of course, we are not sitting back basking in our success. The great thing about our market is that we are constantly innovating,” said McPherson.

“We’re constantly developing products in-house, working with issuers to prepare them for the shift, if you will, in investor climate and investor demand, particularly around ESG.”

“For instance, we don’t think any of our competitors have done as much as we have for issuers, both after they have listed in terms of the marketing and the support we give them in showcasing their companies,” he said.

On the 2022 Venture 50 list, four companies are so-called ‘unicorns,’ each having market caps of greater than $1 billion – a new record for the Venture 50 program.

According to McPherson, technology companies on this year’s list saw a 156% increase in share price and a 309% increase in market cap. Four of the 10 top technology companies on the list serve the blockchain/cryptocurrency space.

The 2022 TSX Venture 50 winners were selected based on year-over-year performance across three equally weighted criteria: growth in market capitalization, share price appreciation and value traded for the year ended December 31, 2021.

The top-ranked company across all five sectors was Emerita Resources Corp. (TSXV: EMO), a Canadian natural resource company.

Other key takeaways from the list were that the average company on the 2022 Venture 50 was 200% larger (based on market capitalization) than companies on the list from just 10 years ago.

Finance alternatives

Meanwhile, finance alternatives have taken up the slack where traditional exchanges fall short.

Wheaton Precious Metals (TSX: WPM; NYSE: WPM) president and CEO Randy Smallwood tells The Northern Miner that the early-stage exploration or development phase is usually “a little bit early” in organizing project debt. “Because of that, you typically must go to some of the more challenging suppliers of project debt – some of the more focused groups, not the general banks. And so, all project lenders require an equity contribution in terms of how you’re going to fund this project going forward,” said Smallwood.

That’s where the metals streaming model it helped pioneer comes into play.

“Streaming is considered an equity contribution. And so, we’ve had great success, mainly because at the stage that these companies are, they’re all trading at a discount,” said Smallwood.

He agrees that there must be a better way to provide better support from the public markets for development companies. “Right now, their shares do trade at a substantive discount to the net asset value of the assets they’ve uncovered and that they’re trying to develop going forward. And that’s one of the reasons that we at Wheaton have had great success because we’re willing to pay very close to net asset value for the production of the precious metals from these assets to help fund them as they grow these projects and build them forward,” said Smallwood.

“Whereas they’re trading at a discount in the marketplace, typically trading at about 0.2 to 0.4 times net asset value, a substantive discount to the net asset value,” said Smallwood.

The other benefit, in his view, is that once Wheaton puts its ‘stamp of approval’ on a developer, which covers a holistic approach including aspects from an ESG, from a community and a technical perspective, “I think that does deliver value,” he said.

“And in fact, we’ve got plenty of examples; all you must do is go back and look at the companies we’ve supported. Once they announced that stream and that Wheaton had applied that stamp of approval, their share price outperforms. It strengthens their share price. It makes future equity financings less costly because they can sell the shares at a higher price, so they don’t need as much dilution,” said Smallwood.