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
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
"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
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.
Kurt Budge, CEO of Beowulf Mining Plc,
that, while tough, the mining downcycle was a
chance for juniors to prove their resilience
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
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."
|First phase drilling at
Savannah’s Mozambique mineral sands
which is a JV with Rio Tinto – one of the few
deals struck between a
junior and a major since the collapse in mining
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
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
"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
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
"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
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
"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."
|By adding other
projects to its portfolio on top of its Kallak
project (core samples from which can be seen above),
increased its market cap from >£5m in 2015 to
£40m in Januray 2017.
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
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