Canada’s junior gold mining sector is on track for its best year for financing in nearly a decade as companies take advantage of soaring gold prices to load up on cash and advance long-delayed exploration and development projects.
Fuelled by a weak U.S. dollar and expectations of inflation, gold prices have raced higher in recent months, hitting US$1,900 an ounce on Friday, only about US$20 below the historic high in 2011. This runup has allowed dozens of Canadian mining firms, long out of favour with investors, to tap equity markets in a wave of bought deals.
Most of the deals have been small, averaging around US$20-million this year. Senior mining companies are generally well-funded and cash-flow positive, so have not needed to raise additional capital. For junior issuers, however, the market opening has allowed them to secure much-needed cash and push forward projects that weren’t considered fundable just months ago. In bought deals, investment banks buy a block of shares from a company, then sell it on to investors.
“As [gold] prices go up, a lot of projects start becoming economical and more profitable,” said Alfred Avanessy, head of investment banking at Cormark Securities Inc. “Every dollar increase in the price of gold above your break-even price, if you’re a mine, falls straight to the bottom line.”
There have been 49 equity raises by Canadian gold miners so far this year compared to 53 in all of 2019, according to data from Refinitiv. Most of these deals have happened since mid-May, when investment bankers realized the opportunity and began rushing to get deals in front of investors.
“In one week in June, we did three bought deals just for mining. We haven’t seen that level of activity in a long time,” Mr. Avanessy said.
Ilan Bahar, co-head of BMO Capital Markets’ global metals and mining group, pointed to two recent deals as indicative of the strength of the market. Artemis Gold Inc. raised $105-million in a bought deal in June to buy a mine in British Columbia from New Gold Inc. In July, Argonaut Gold Inc. did a $110-million bought deal to move ahead with construction at its Magino mine in Ontario.
“Those sorts of financings would have been really hard to do even a few months ago,” Mr. Bahar said.
On the buy side of the equation, the outperformance of the precious metal sector is drawing in new investors. Specialty mining funds have been the biggest buyers of these deals. However, generalist fund managers are also starting to take an interest in larger deals as a way to rebalance their portfolios, said Jon Case, precious metals portfolio manager with Sentry Investments Inc.
The materials sector, which is dominated by gold companies, now makes up close to 16 per cent of the S&P/TSX Composite Index. That’s almost double what the weighting was in 2015, and many generalist funds are considerably underweight gold stocks.
“There’s four or five big funds that are writing cheques to whoever will take it because they’re trying to increase their asset allocation to the gold space and gold equities in particular,” Mr. Case said.
At the same time, generalist funds typically buy larger, more liquid stocks, so their impact on the smaller cap end of the market will be limited.
With more bought deals getting done, the environment for mergers and acquisitions will likely change, although there is disagreement about whether mining M&A will increase or diminish with better access to capital.
Barry Allan, an analyst with Laurentian Bank Securities, said M&A could slow as companies that previously might have needed to be acquired in order to advance a capital intensive project suddenly have options to advance it themselves.
“Companies are not as wholly reliant on a major mining company coming in to fund either development or exploration. The onus to rely upon M&A becomes diminished,” Mr. Allan said.
BMO’s Mr. Bahar took the opposite view. Because exploration companies have been starved of capital in recent years, few new high-quality assets have been discovered.
“As more money gets spent on exploration as the markets fund that activity, there will be assets found that do interest senior and intermediate companies,” Mr. Bahar said.
“And generally in a rising commodity price environment there tends to be more M&A, just because companies are feeling better about their own prospects, and so they feel comfortable taking on an acquisition,” he added.
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