It’s the start of a new year and decade. Cue all the flashbacks and predictions.
The year ahead will mark the resurgence of the junior miner. We’re starting to see some money invested in producers. Producers feel better about their own balance sheets, valuations and multiples. And when you feel better, you start to buy. What are they buying? Advanced-stage exploration assets and single-asset companies, in tier-one jurisdictions, with producing mines. But there are only a few of them to buy. Once again, scarcity reigns.
Here’s why it’s going to be good to be a junior miner in 2020.
Deals, deals, deals
The mergers and acquisitions (M&A) we have witnessed in 2019 can be boiled down to mostly financially and technically burdened current and past-producing mines.
The senior producers have a stronger valuation multiple than the mid-tiers, and the mid-tiers have a better valuation multiple than the junior producers and so on down to the beaten-up advanced explorers where the valuation discrepancy is glaring. The deck is stacked in favour of M&A, and the stars are aligning between producers and advanced explorers and developers.
Adding fuel to the fire and coming to a theatre near you (as a rerun), we will start to see investors demanding growth from the CEOs managing these gold producers — we have seen this movie before in the last cycles and we’ll see it again.
Yet most of the producer-owned project pipelines are largely dry. Think about it. When was the last big gold project construction launch by a major producer? Agnico Eagle and their northern Canadian assets. Who else? They are few and far between.
Without their own project pipelines, we all know where they need to look next: the juniors with advanced-stage assets in tier-one jurisdictions.
Generalist investors haven’t returned. No problem!
Much to our collective disappointment, the generalist investor has not returned to the precious metals space in droves. The gaps left by generalist funds continue to be filled by others and will continue to do so in 2020. Who are they?
1. Merchant banks, high net-worth retail/family offices and private equity
In a “Game of Thrones”-like manner, smart and sophisticated high-net worth investors, merchant banks and private equity have been placing a lot of bets and setting up kingdoms of their own capital invested in junior miners. They have even banded together on certain deals to show added bench strength (think Osisko Gold Royalties and Orion, Ross Beaty and Mubadala, a global investment company in the United Arab Emirates, et al.) Just watch, they will emerge with a larger seat at the table, with something to say in 2020.
2. Mining and quant investing strategies
The year 2019 marked a period when miners started to care about quantitative analysis (quant) investing strategies. And so they should: for miners, this represents a large, untapped source of investment capital that could replace what the generalist investors used to fulfill. I’m told by my friends working in the ranks of the major miners and producers that they are starting to pay close attention to quant research. Juniors are choosing to frame their results, news and communication to appeal to quant investing. There will come a time when the quant analyst’s machine will say “buy” based on the analysis, and this will count for as much or more trading volume as a call made by a traditional mining research analyst. We’ll see more of this in 2020, while we wait patiently for the generalists to return.
3. ATMs from the two-star motel of 2015 to the four-star resort of 2020
“At-The-Market” financings used to be regarded as a next-to-last resort for financing in the resource sector. This is no longer the case. In 2019, a larger number of ATM financings occurred via the bigger players in our sector: Seabridge, First Mining, Coeur Mining, Eldorado Gold and even royalty giants like Franco Nevada raised large sums this way and were in huge demand by investors, especially in the U.S., where the structure is far less cumbersome for the capital raiser. For now, this model only really works for larger cap or highly liquid issuers (juniors need not apply … yet). However, like the quant investors, ATMs are filling the gap traditionally occupied by the generalist funds. Is this faster, non-sticky money? Yes, and I predict we will see more of this style of financing in 2020.
Sounds all great, right? So what’s the downside?
Sadly, we are not seeing a fast pace of funding for new mining and exploration technologies. I have my ear firmly to the ground on this front, and I see little in the way of new initiatives. Newmont Goldcorp is not adopting Goldcorp’s “cause-célèbre” to fund new technology. Barrick’s not doing it, Agnico Eagle’s not doing it, so who is? There are a few mining venture capital funds around, but from what I hear, it’s still tough for them to raise capital to deploy new technologies. Why?
1. Like the music business in the 1970s, 1980s and 1990s, rock emerged when front men (and women) banded together to form ‘supergroups’ in the music industry (think Audioslave, The Travelling Willburys, Asia, Emmerson, Lake & Palmer and so many others). We haven’t seen this yet in the resource business and I think there would be huge investment demand for this type of setup. Are egos getting in the way? Could the rockstars all play on the same stage? If they could, it would be amazing. The recent Equinox and Leagold combination is a step towards “supergroup” status, uniting the likes of Ross Beaty and Neil Woodyer.
2. The results have been astounding. So many benefits, so many discoveries and many new mines have come as a result of flow-through financing and its various derivatives, including charity structures. South of the border in the era of “America first,” the focus is on strategic mineral safeguarding and job creation. Perhaps it’s time to consider and implement a similar incentive strategy in the United States? I’m advocating for a U.S. flow-through financing model for the resource sector, as I firmly believe it will be an immense attraction to investors and to current and future governments alike.
So, what’s the game plan for 2020? Be nimble. Be creative. Be open. 2020 is going to be a fun year for the junior miner.
— George Salamis is president and CEO of Integra Resources (TSXV: ITR; US-OTC: IRRZF).