VANCOUVER — For three years the sector struggled through a dearth of financing and mergers and acquisitions (M&A) activity. Two months into 2014, it seems this year will be better: equity valuations are improving, M&A offers are surfacing, and companies are again raising money.
Well, some companies are raising money. For others, the capital markets remain closed for business.
Today’s resource investors have a clear list of criteria. For producers that list includes contained costs, serviceable debt loads and reasonable expansion plans. Companies meeting those bars can access capital, as evidenced by Detour Gold (TSX: DGC; US-OTC: DRGDF) and Imperial Metals (TSX: III; US-OTC: IPMLF).
Detour tapped the equity markets for $172.5 million, selling 18.7 million shares at $9.25 a piece. The company’s Detour Lake mine is the largest gold mine in Canada, with 15.6 million reserve oz. calculated at a conservative US$850 per oz. gold price. In 2013 Detour Lake produced 232,287 oz. gold, but output is expected to more than double in 2014, potentially reaching 500,000 oz.
Imperial chose to sell debt rather than equity and had no trouble dealing US$325-million worth of five-year senior notes at 7%. In fact Imperial found so many keen buyers that the company cancelled a planned marketing tour and ended up offering a yield 50 basis points below what management thought would be needed. Imperial will use the funds to finish building its fourth mine, the Red Chris copper–gold operation in northwest B.C.
AuRico Gold (TSX: AUQ; NYSE: AUQ) is hoping for a similar response, having recently launched a $300-million senior note offering. The difference is that AuRico needs the money to repay outstanding debt — rather than finish building a new mine — so we’ll see how the market responds.
On the pre-production front, only companies with promising discoveries or feasibility stage projects can access capital on reasonable terms. All those with early stage exploration assets are still struggling to survive.
In the first two months of the year, 44 Venture-listed companies closed financings worth less than $1 million. Thirty-three of those deals issued shares at 10¢ apiece or less.
By contrast, only 18 TSX-listed entities closed financings worth $3 million or more. A few were producers, like Detour. The rest are companies expected to reach production in the medium-term or be taken out for a good discovery.
True Gold Mining (TSXV: TGM; US-OTC: RVREF) is the former: a junior expected to reach production by the end of next year. And the company’s Karma project in Burkina Faso is precisely the kind of mine the market likes right now: a technically simple heap-leach gold operation with a low capital cost, a high return rate and resources to fuel future expansions.
Those attributes enabled True Gold to pull in $51.9 million through a bought-deal financing and private placement. The funds brought its treasury to $70 million, enough to start building the Karma mine.
Similarly, Roxgold (TSXV: ROG; US-OTC: ROGFF) just raised $25 million to keep pushing its Yaramoko gold project towards production. Like Karma, Yaramoko is planned as a simple heap-leach operation with low capital requirements and significant expansion potential. A preliminary economic analysis predicted Yaramoko could generate a 47% after-tax internal rate of return. Roxgold is now working on a feasibility study.
Kaminak Gold (TSXV: KAM; US-OTC: KMKGF) is further from production, but its Coffee gold project in the Yukon checks enough items on the list to attract investment dollars. Coffee offers 2.6 million oz. oxidized, heap-leachable gold in a near-surface deposit with lots of growth potential. New management last year transitioned Kaminak from a pure explorer to a company looking towards production. The first economic assessment of Coffee is due out this year. Coffee is a good discovery and Kaminak has an eye on production, a combination that convinced a syndicate of banks to underwrite a $10-million private placement.
Midas Gold (TSX: MAX; US-OTC: MDRPF) is at a similar stage with its Golden Meadows project in Idaho. The project is already home to 4.2 million indicated oz. gold and is located in a historic mining district, attributes that boost its odds of becoming a mine. Those odds let Midas raise $12.8 million in a recent financing. Teck Resources (TSX: TCK.B; NYSE: TCK) put $1.2 million into the financing, acquiring 1.3 million shares to maintain its 9.9% stake in Midas.
These are the good stories. There are, however, lots of sad ones out there as well. According to various estimates, 850 of the 1,250 resource companies on the TSX Venture exchange have less than $200,000 in working capital, which is barely enough to keep the office lights on for a few months.
And those are the companies with little hope of tapping into 2014’s tight trickle of resource capital.