London calling

“Canada is producing the most interesting development projects in the mining industry anywhere in the world.” The speaker isn’t one of our trade commissioners or a Vancouver stock promoter. He is gold mining analyst Kjeld Thygesen of N.M. Rothschild & Sons, the large merchant bank that has played a central role in international bullion trading for many years. As we spoke in his London office, a small group of “The City’s” top bullion traders gathered across the hall in a small room to determine the afternoon gold fix. The verdict: $464(US) an ounce — a 4-year high. It wasn’t hard to sense the euphoria coming back to the bullion markets. And this time around, Canada has become an important player. It is late April and the Canadian gold mining industry is enjoying its latest boom. Not only are discoveries being made with unprecedented frequency; two or t hree new mines are being announced every month. While flow-through financing can take most of the credit for the discoveries, the never-ending realization that a gold mine is a risky investment continues to account for the dearth of Canadia n dollars for capital projects. As one London broker recently noted, “Canadians don’t seem to want to invest in their own things.” The situation would be seriou s if a small group of powerful financiers in London hadn’t begun taking more int erest in Canada than at any other time since the fur trade boom 200 years ago.

Canada is certainly a leading contender for attention among the world’s goldbugs. Although we fell to fourth place among non-communist gold producers last yea r (behind the U.S.), Canadian production has increased about 150% since 1981, wi th an estimated 1987 production of 125 tonnes, or about four million ounces. Thi s has required more than $1 billion in capital expenditures, and hundreds of mil lions more are needed this year and next to keep up the pace. Much of it has alr eady been raised, coming from London and Zurich in the form of loans, private pl acements and straight equity financings. On top of that, European institutions h ave been heavy buyers in the stock markets. In fact some experts feel the Europe an influence is largely responsible for pushing the price-to-earnings (p/e) rati o of gold stocks to what many consider absurd proportions. (It averaged 71.6 in April but has backed off somewhat since then. The Dow Jones Industrial Average, by comparison, had a recent p/e of only 20).

While few of those involved would hazard a guess as to the total amount of European funds that have moved into Canadian gold mining in recent years, the total has easily surpassed the $1-billion mark. This year alone financings for major parts of Cambior ($150 million), Hemlo Gold ($235 million) and Noramco ($50 mill ion) were completed in London. And there have been literally dozens of smaller ones, ranging from a few hundred thousand dollars to $10 million.

Probably the strongest impression left on a reporter after a week of interviewing some of London’s top mining analysts is just how knowledgeable they are — not only about mining in general but about the North American scene in particular. They take their business seriously. At James Capel & Co., there are nine ana lysts on the mining desk. At L. Messel & Co., a unit of Shearson Lehman Bros., t here are eight. Many of the “smaller houses” have two or three. And despite the power behind them, they are frequently willing to look at situations which would be scorned by their counterparts on Bay Street.

“Interest in Canadian gold stocks has really taken off in London during the past year,” says John Bretton, a public relations consultant. The fact that his fi rm is able to specialize in North American resource stocks is indicative of that interest. “First of all, a lot of people stopped dealing with South Africa,” continues Bretton. “Some dealt with Australia, but suddenly they realized there wa s money to be made in North American golds.” He notes that London analysts will often pick up on new stocks that are not yet well known in Canada.

One unusual characteristic of the London financial houses is their frequent willingness to work together on new issues, giving an outsider the impression of a large investment club. As Zurich-based financier Marino Pieterse notes, “one thing that is apparent is the sense of community in London, which you don’t see in the rest of Europe.”

At least some of the analysts seem to have a definite game plan for the community. As Andrew F de P Malim of Lion Mining Finance explains: “London wants to co ntinue its traditional role as mine financier to the world. A small group of peo ple here want to recreate the 1880s.” He is referring to the beginning of the la rge South African gold mining empires which were largely financed out of Britain.

It is interesting to examine the reasons why so much money is coming out of Eu rope rather than New York or Hong Kong, both of which are big players in the wor ld gold markets. The most obvious reason is the general withdrawal from South Af rican gold stocks, which were largely held in Europe. Just as important is a sen se of how much potential there is in developing gold companies. “In the late 196 0s and 1970s smaller companies didn’t have a prayer of raising money in London,” says Malim, who notes that almost no one was doing research on small companies in those days. That has changed drastically, and part of the reason is the succe ss some of the institutions have experienced in Canada. As most analysts acknowl edge, London made a lot of money from the Hemlo discoveries, and they know a goo d thing when they see it.

It was early 1982 when Vancouver broker Brian Moorhouse of Brink Hudson & Lefever first spotted the potential of Hemlo and, over the telephone, raised the ex ploration financing for Goliath and Golden Sceptre for a number of his major Lon don institutional clients at 75 cents per share. This led to the discovery of the huge Golden Giant deposit. By September, when the shares had reached $5, Philip Seers of of Phoenix Securities and David Prain, then a fund manager wit h Rothschilds in London, came over to Canada, walked the Hemlo properties and immediatel y offered to finance the next phase of exploration and development. This turned out to be unnecessary because the properties were optioned to Noranda. Phoenix n evertheless arranged a small private placement in December of that year; and by the time it closed in January, the shares were above $20. “We and our clients ma de 10 times our money, including the warrants,” recalls Seers, who has continued to help finance Hughes- Lang companies ever since. It is hard to imagine that these two financings would have been done on Bay Street.

It was about the same time that Ian Wright of Alexander Laing and Cruikshank began getting interested in International Corona Resources and Keith Bryant of mi m Limited became impressed with what he saw at Echo Bay’s Lupin mine. Those with honest memories will recall that in 1982 none of these situations was received very favorably in Canada.

As the success of these and other ventures began to catch on in London, interest in Canada began to grow. Some of the major producers, like Lac Minerals and A merican Barrick, were able to raise considerable amounts in Europe. Growing comp anies like Canamax and Muscocho found audiences more than willing to listen. Then come the Blackdome mine, which many in London considerthe most important Canadian showpiece after Hemlo. That mine was largely financed out of Europe.

Other factors were contributing to the European interest as well. Foreign investment restrictions in Canada were loosened considerably in 1984 with the disman tling of the Foreign Investment Review Agency. At the same time, the Securities and Exchange Commission in the U.S. was tightening up its regulations, making it harder for small Canadian companies to raise money south of the border. On top of those things, companies found a lot of prestige going to Europe to raise money.

“There is a lot of ego attached to a Canadian company raising funds in London, ” sa
ys Arnold Taylor of James Capel & Co. He adds that “a lot of shysters think that by travelling 5,000 miles they can pull the wool over our eyes. Essentially , the market in Canada was saturated and they needed a place to raise further capital and increase their distribution.”

In the wake of the Hemlo discoveries, brokers and analysts in London were inun dated with calls from Canadian companies looking to raise money. While this has slowed down somewhat, the calls continue. “We get about four or five calls a day from companies around the world looking to do mining deals,” says Taylor. “Only about 5% of them are worth looking at, and we may only do about 1% of them.”

Andrew Malim agrees. “We have looked at 460 projects during the past three years,” he says. “We have actually become associated with nine of them. ” But Lion has had a good success rate, both with the projects it has become involved with and those it bought on the open market. Although Lion is actually a mine finance consulting and research firm (a rare breed in Canada, notes Malim), it has also had considerable success in resource fund management. This has prompted it to join with other European institutions to create European Mine Finance, a fund which will be sponsored by N. M. Rothschild, with James Capel and the London office of Yorkton Securities to be principal brokers. “We intend to keep the fund small to start off with,” says Malim, with a view to a listing on an appropriate exc hange in due course.” The idea behind the fund is to put up money for promising mine projects, including some in Canada.

Like most Londoners interested in the Canadian gold market, Malim prefers to talk to companies sometime between the discovery and production, which usually means it is highly “geared”, or leveraged. “We will talk to a company that believe s it will need money in the future (for production),” Malim says.

Rothschild’s Thygesen echoes that sentiment. “We prefer to get in at a relativ ely early stage. If you don’t get in early enough, you won’t have the real winne rs. We don’t feel comfortable with 40 or 50 times earnings.” But, again, Thygese n says production has to be a realistic target. “In this game you are going to g et some bad ones, but that is the nature of mining.” Some of the houses, however, like to see a feasibility study. “It takes us as long to evaluate a large project as a small one,” says David Williamson of Messel. “While we like to encourage all companies to come by and see us, we have to be careful because a bad issue would hurt our reputation very much.”

Messel, which is well known for the voluminous research it publishes on mining , recently merged with Shearson Lehman to combine mine financing with bullion tr ading. However, the size of the new company precludes it from participating in t he smaller issues. “We prefer to raise at least $10 million for a start,” says W illiamson, who admits they occasionally get into the after-market on the smaller issues.

While the project itself is the most important factor to the financiers, some take just as much care in examining the individuals behind the companies. As Mer fyn Roberts of the Target Group gold fund says, “there are lots of good resource s in the world; we are more concerned with the management.”

Mim’s Bryant agrees, saying: “the geology is only one side of it. There is so much based on the mine managers and the company management. Reputation has a lot to do with it. The Vancouver Stock Exchange hasn’t done very much for Canada’s reputation.” He cautions that he is not referring to the reality of the exchange , but, rather, to “the ignorance (in London) about what some of the people are r eally like. You can’t really trust them until you know them.”

One major beef among the analysts in London, who purchase much of their stock through private placements, is the hold period that the Toronto and Vancouver ex changes put on such issues — generally six months and one year respectively.

“The problem with hold periods,” says Bryant, “is that if the stock is in a fund, and some people want to get their money out, you can’t sell certain stocks a s part of the liquidation.

The market has cooled off considerably since most of these statements were made. In fact Canadian analysts are suggesting that London is now a sel ler, rather than a buyer, of Canadian stock. But the City tends to take a much longer-term look at mining. “As long as gold stays above production cost levels, there will be financings even in dull periods,” Seers predicts.



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