Junior mining: Back from the brink?

By IM Staff
Published: Thursday, 26 January 2017

Half a decade on from the collapse of the global mining boom, a rally in commodity markets last year caught many investors off guard and has created a weak but welcome tailwind for the stalled exploration industry, Rose Pengelly, IM Correspondent, finds.

JuniorMining1 

After an especially torrid five years for the mining sector, a surprise turnaround in global commodity prices in 2016 came as a relief to the whole industry.

The upturn in what had been desperately fragile bulk commodity markets, such as 
iron ore and coal, seemed to persuade investors that mining was not, after all, in terminal decline. 

So far, most of this tentative positivity has been confined to the world’s large mining firms, whose scale allowed them to reap the biggest returns from higher mineral prices.

For junior miners still several years away from production, the recovery in physical market conditions is a welcome change of scene, but in a highly unpredictable climate, investors are remaining cautious about ploughing their money into exploration.

"Mining stocks are at an all-time high, but whereas people are happy to back the majors, investors are unlikely to start putting money into juniors yet," says Raj Karia, head of corporate M&A and securities for Europe, the Middle East and Asia at global law firm, Norton Rose Fullbright. He predicts it will be at least "a couple more years" before funding comes back to these companies through the equity markets.

Jonathan Williams, corporate broker at specialist natural resources brokerage RFC Ambrian, agrees that although mining is slowly regaining favour with investors, interest in the exploration sector is still "incredibly patchy". 

"Funds have started to realise that they need some commodities exposure," he explains. "They were happy to miss out on the first part of the rally last year but now they want to be in it, albeit at very low risk. This means investing in the majors and established companies." 

But while investors are still wary of high risk investments, the strong performances of mining shares on global stock exchanges suggest that equity markets are confident the recovery in commodities demand is sustainable.

Figures for Canada’s Toronto Venture Exchange (TSX-V), the world’s biggest exchange for junior mining equities on which around half of all the volume traded is made up of mining stocks, show a 35.6% year on year increase in total financings raised to Canadian dollar (C$) 4.6bn ($3.5bn*) during the first nine months of 2016. 

In December, the S&P/ASX 300 Metals and Mining Index on the Australian Securities Exchange (ASX), the second largest market in the world for mining listings, achieved its highest intraday value since 2014 and climbed by 53% over the course of 2016, its first annual rise since 2010.

JuniorMining2  
Kurt Budge, CEO of Beowulf Mining Plc, thinks
that, while tough, the mining downcycle was a
chance for juniors to prove their resilience and
create value.
Beowulf Mining

The flight of finance

Traditionally, new mining projects have been funded by the majors, equity and some debt. Following the collapse of the last mining boom, equity rapidly exited the sector, while big mining companies came under pressure to axe spending and start returning cash to shareholders.

"Investors put money into mining companies during the supercycle, but it got to a point when they didn’t want growth anymore and instead started asking for returns on their investment," says Karia.
Most industry observers regard 2012 as the year that marked the end of the last mining upcycle, when Chinese commodities demand began to pull back noticeably. This shift in fundamentals had a strongly negative effect on sentiment, prompting lenders to tighten the availability of debt. The sudden shutting off of all mining’s main sources of cash stopped many juniors in their tracks. 

Various types of alternative financing have been discussed at mining conferences over the last few years, from private equity and M&A to streaming. At the Mines and Money London Conference in December 2012, fund managers confidently predicted that a shortage of capital would lead to a wave of consolidation in the mining industry.

In fact, M&A in the sector has practically stalled. Figures from global accountancy firms EY and KPMG indicate that since peaking at around $200bn in 2007, the value of M&A deals in the mining sector has been in more or less steady decline, sinking to $36bn in 2015.  Figures for last year’s mining M&A activity are still being totted up, but EY’s most recent analysis shows that the overall value of deals in the first nine months of 2016 retreated by 43% year-on-year.

Karia says that discrepancy between buying and selling enthusiasm typifies cyclical adjustment in the mining industry. "The M&A market needs to get back to equilibrium, where buying and selling activity match. In 2015, mining companies announced plans to sell assets, but there were no buyers. In 2016, there were buyers but no sellers." 

Karia doubts that mining M&A will rebalance within the first half of 2017. The fall in commodity prices and high corporate debt levels led investors to demand companies shed assets rather than acquire them – a trend that juniors are all too aware of.

"In the past, you could develop a project with the view that there would probably be someone to buy it off you further down the line," says Fortune Mojapelo, CEO of AIM-listed vanadium developer, Bushveld Minerals Ltd. "Now, juniors need to be prepared to take an asset into production."

JuniorMining3  
First phase drilling at Savannah’s Mozambique mineral sands project,
which is a JV with Rio Tinto – one of the few deals struck between a
junior and a major since the collapse in mining investment.
Savannah Resources 


A change of mindset

Mojapelo thinks that the realisation that easy sell-offs are a thing of the past has changed the way juniors approach their operations. For better or worse, investors’ abandonment of the exploration space eased some of the scrutiny on junior mining companies and allowed them to be more experimental with their business strategies. 

South Africa-based Bushveld decided to use the lull in the mining cycle to expand its footprint by acquiring another business – in the form of a controlling stake of the vanadium producing Vametco project in South Africa which it bought from Russian miner Evraz – and launching a new subsidiary – Bushveld Energy – in early 2016.

"We decided we wanted to build one of the world’s the largest vertically integrated vanadium platforms with a long term view of the industry," Mojapelo explains. "At the time we agreed the Vametco deal, vanadium prices were so low it was estimated that 50% of producers were losing money."

He admits that Bushveld had to engage in an "explanation exercise" with its shareholders, but insists that its long-term backers were fully behind its plans. He adds that the company was so assured that its strategy to integrate upstream was the right thing to do, that it didn’t view the moves as being risky.

Other early stage companies have likewise sought to make the most out of the industry’s downturn. Kurt Budge, CEO of London AIM and Stockholm-quoted Beowulf Mining Plc, thinks that, while tough, the mining downcycle was a chance for juniors to prove their resilience and create value.

Beowulf, which has brought graphite and polymetallic deposits in Sweden and Finland into its portfolio on top of its flagship Kallak magnetite project since Budge took over the helm in late 2014, has increased its market cap from less than £5m in 2015 to around £40m ($49m) in January 2017. 

"We’ve added optionality to the company through these acquisitions," says Budge. "This leaves us in a good place for when the markets do settle down. Plus, we haven’t had to suffer margin erosion, as have producers."

Against the sector’s recent bearish odds, some juniors have struck lucky when it comes to catching the eye of big investors. In June 2015, AIM-listed Savannah Resources Plc entered a joint venture with Anglo-Australian mining giant Rio Tinto Plc to develop Savannah’s Jangamo and Mutamba mineral sands deposits in Mozambique. 

Savannah’s licences happen to be adjacent to Rio’s Chilubane mineral sands occurrences, but plenty of projects on the fringes of majors’ operations never receive any interest from their larger neighbours.

"Aside from the quality of our deposits, I think what marked us out were our in-country credentials and our professionalism," says David Archer, Savannah’s CEO. "We’ve been working in Mozambique for a few years now and know the country pretty well, which is reassuring for any potential partner – plus the fact that we could hit the ground running."

The relationship between Rio Tinto and Savannah is slightly different from a typical JV, he says, in that it gives a junior the chance to earn into a major’s project, rather than the other way around.

Yet, despite being in partnership with one of the world’s biggest mining companies, Savannah, which also has other exploration projects – a copper-gold mine in Oman and a lithium deposit in Finland – still has to raise its own cash like any other junior. 

"We have a relatively traditional pipeline of projects at different stages," Archer says. "In terms of what investors we bring in, there are a lot of variables at play. Each individual investor has their own objectives and risk parameters."

JuniorMining4  
By adding other projects to its portfolio on top of its Kallak magnetite
project (core samples from which can be seen above), Beowulf has
increased its market cap from >£5m in 2015 to £40m in Januray 2017.
Beowulf Mining 

The outlook for financing

Few industry spectators foresee junior mining investment ever returning to the heady levels of the supercycle, but sustained restoration of confidence would help kick-start moribund exploration activity. 

Karia thinks that perhaps the only effective catalyst for this is the perception of shortages in mineral commodities. "It’s important to remember that mining is a cyclical industry with a herd mentality," he says. He notes that investors outside of the major miners generally lack long-term perspective and that, as a consequence, very few managements will approve counter-cyclical investing.

Some private equity has come into the mining sector against the grain of pusillanimous stock markets. The sums invested to date fall a long way short of closing the gap left by the departure of equity funding and debt, but this could still change. "So far, private equity hasn’t come in as much as people thought it would, but this time we might see the funds coming in to take advantage of the next upcycle," Karia speculates.

Williams suggests that even though investment trends are ultimately driven by macro factors, juniors should heed advice to demonstrate credibility. "Just turning up on the doorstep with a project still isn’t good enough," he says and urges explorers to take advantage of thawing investor sentiment to line up debt and offtake agreements, where possible, before going to equity markets.

Williams believes that there is some evidence of investors starting to look again at greenfield projects, on the assumption that the bottom of the market has been reached, but stresses that it is still early days.

Prices for many minerals and metals have already started to soften and some bearish analysts have warned that the bulls are looking backwards, not forwards.

Either way, the feeling among junior miners as the industry heads towards the two biggest events in the mining finance calendar – Mining Indaba in Cape Town and the Prospectors and Developers Association of Canada (PDAC) conference in Toronto – is certainly more positive than it was a year ago.

"Early 2016 was really a very grim time for mining," Archer recalls, joking that if mining executives weren’t quite at the point of jumping off tall buildings, they were probably not too far away from that point. 

It may be that 2016’s unexpected prosperity for the mining industry came at the expense of 2017, and investors are famous for getting their timing wrong. But caution and a greater degree of normality in asset valuations may mean that junior mining is backed smartly, if not extravagantly, this year.

*Conversions made January 2017