Canada’s junior mining sector unearthing new prospects

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After four years of hard times and grinding retreat, Canada's junior mining sector is once again attracting fresh capital and new investors.

The recent outburst of enthusiasm is centred on gold miners, says Michelle Grant, senior vice-president at consultants Ernst & Young and leader of its mining and metals transactions team in British Columbia.

She expects acquisition activity in the sector to pick up speed in the months ahead as companies look for ways to ride the upswing in precious metals prices.

"There's a new fear of missing out," she says. She has talked to several mining executives who already regret not bidding more for potential acquisitions last year, given the big run-up in gold miners' shares since the start of the year.

Their abrupt shift in attitude demonstrates – once again – the tendency of miners and mining investors to jump from despair to euphoria, and vice versa.

Until January, miners had been trapped in a vicious down market for years. Ms. Grant chronicles the extent of that slump in a report published this week.

At the height of the commodity supercycle in 2011, miners listed on the Toronto Stock Exchange and TSX Venture Exchange enjoyed a market capitalization of $426-billion, she writes.

By the end of 2015, the market value of those companies had shrunk to a mere $180-billion.

Last year alone, 172 mining and metals companies delisted – that is, stopped trading on the two exchanges. The wave of delistings covered roughly 12 per cent of publicly traded miners in Canada.

To be sure, much of the delisting was strategic. The single most common reason was a merger or acquisition that combined two companies into one.

Tough times in the industry prompted many companies to join forces and pool cash, Ms. Grant says. In other cases, acquirers with access to cash saw the opportunity to snap up other miners at bargain prices.

She expects to see to see even more acquisitions ahead, but for different reasons.

"People want to invest in a market that's going up," she says. "They don't want to catch a falling knife."

Ego and a desire for scale will drive some transactions, she says. In other cases, mid-tier or larger companies with operations in risky locales will be looking to acquire rivals with properties in safer political jurisdictions.

Ms. Grant points to Centerra Gold Inc.'s deal to acquire Thompson Creek Metals Co. as an example of this trend. The transaction earlier this month was motivated in large part by Centerra's desire to balance the uncertainties surrounding its mine in Kyrgyzstan with Thompson Creek's more stable operations in British Columbia.

As acquisition activity across the mining sector picks up, investors appear to be once again willing to take a flyer on a junior miner with a promising story.

In May, the most recent month for which figures are available, $282.7-million in private placements was raised by miners listed on the junior-dominated Venture exchange compared with only $199.5-million on the more stately TSX. "That means juniors and mid-tier miners raised more capital than the larger players," Ms. Grant notes.

Six of the top 10 financings on the Venture Exchange in May were done by mining and metal companies. The largest was a $44.1-million capital raise by Gold Reserve Inc. and the smallest was a $10.3-million deal by IDM Mining Ltd.

Miners on both exchanges have raised $4.8-billion in equity capital so far this year, well ahead of the $4.1-billion reached at the same point last year.

The influx of capital is building up bankrolls that can be used for many purposes, including new acquisitions. "More deals are coming," Ms. Grant says.