A few weeks ago Patricia Mohr, Scotiabank’s vice-president of economics and a commodity market specialist, participated in a panel discussion in Vancouver organized by the British Columbia Securities Commission. The subject was financing for junior mining companies, and the mood was grim.
“Junior mining companies and the TSX Venture Exchange are integral to economic activity in Vancouver, and so there’s considerable concern about just how much capital is available for them,” she said in an interview after returning to Toronto. “Many observers are quite worried that the lack of equity capital may actually cause some of these companies to be delisted from the TSX Venture, because they can’t meet basic working-capital listing requirements.”
That would be bad news both in and outside of the industry. Mining accounts for 7.8% of all the goods produced in the province — and that doesn’t include the spin-off benefits it brings, from office occupancy rates to the livelihoods of downtown bars and restaurants.
Mohr describes the junior-mining sector and the TSX Venture operations in Vancouver as the “heart and soul” of the city, and warns in a research note published on Oct. 30 that a revival of equity capital for junior miners will largely depend on a cyclical rebound in metal prices and improved investor sentiment among the senior mining companies, most of whom have shifted their strategy away from expanding production to focus on more disciplined capital spending. And that means there is less money and even less appetite amongst the majors for buying junior miners and their assets.
At the same time, equity valuations are so low that few juniors want to go to the markets to raise money. Mohr notes that year-to-date, equity valuations are down 16.6% for S&P/TSX Capped Diversified Metals.
Mohr says the world of junior mine finance, whether in Vancouver or elsewhere, is in a “near crisis,” with many of the small exploration companies locked down in “survival mode.” And while some juniors can turn to streaming arrangements or strategic-equity investments in exchange for off-take agreements, she says, this type of financing is typically reserved for those lucky enough to have well-advanced projects.
One avenue of financing that will be even more prevalent in the coming months and years, she adds, is from private-equity firms. “Mergers and acquisitions activity —financed by private equity — is picking up, sensing that a bottom in equity valuations is close at hand, with the object of rolling out an initial public offering in about four to five years’ time,” she explains. “If a company has a deposit that looks lucrative and can be developed in a reasonable time frame, private investors might be interested . . . they are taking advantage of what are really value plays.”
Many juniors that have been shut out of the public debt and equity markets for the last 15 months are feeling the pressure to raise capital before value destruction becomes even more significant, some private equity firms say, noting that their terms are more flexible than more traditional financing options, such as syndicated loans and project finance.
In January Bloomberg reported that private equity firm Apollo Global Management was setting up its first natural resources fund, while commodity trader Trafigura Beeher BV was planning to launch its first private-equity deals in mining and metals, and other firms, like Denham Capital Management and Waterton Global Resource Management, were talking about spending billions of dollars in the industry.
In late September, start-up X2 Partners — backed by Mick Davis, Xstrata’s former CEO — received a substantial investment from TPG, a private-equity group based in the U.S. In January, Apollo invested $300 million in NRI Management, which has a mining operations team that focuses on coal.
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