Just when the mining industry was poised to show off its deepening devotion to smarter management, leaner operating methods and stronger balance sheets, a raft of investors suddenly lost interest in the sales pitch.
The reason? Cannabis, whose heady growth and gaudy promises vacuumed up a big chunk of the speculative capital last year that has typically found its way into the coffers of Canada’s junior miners.
Cannabis euphoria has lured billions of dollars from major consumer brands seeking a foothold in the newly legal business in Canada and has drawn gamblers and ordinary investors away from other segments of the market.
“It certainly has had an impact,” says Dean Braunsteiner, PricewaterhouseCooper’s national IPO and mining and metals leader in Toronto. As the cannabis sector exploded, a trickle of investment dollars turned into a torrent of more than $8-billion flooding into the fledgling industry. “That had a massive impact on industries such as mining, which normally would attract some of that startup, or riskier, capital.”
Canadian initial public offerings by companies eager to tap into the biggest horticultural investing craze since the Dutch went wild over tulips in the 17th century brought in $491.1-million in 2018, more than 20 per cent of the total raised by all sectors.
Mining IPOs, by contrast, took in $51.6-million, down sharply from about $830-million the previous year, although the number of issues climbed to 25 from 20 in 2017 thanks to a late surge in small equity financings by junior players.
This year, miners may stay away entirely if market volatility worsens in response to deteriorating global trade and economic conditions.
Companies looking to go public need a relatively stable equity market. “If you’ve got significant swings up and down, it becomes difficult to price [an issue] and will stall a number of companies looking to IPO,” Mr. Braunsteiner says.
Add in worries about U.S.-China trade friction, the slowing of key economies and the fallout from Brexit, and “2019 could be a challenging year,” he says. But on the flip side, “if trade issues are resolved and the global economy starts to pick up, that could certainly change the demand for IPOs quickly.”
Investors in existing mining equities have also succumbed to reefer madness. But the shift of capital is not necessarily negative for established mining companies or their financing prospects.
“The hot money is going to go to the sector that’s yielded the most immediate returns. So the very marginal juniors are going to be outcompeted by cannabis,” says Rick Rule, chief executive of Sprott U.S. Holdings Inc. in Carlsbad, Calif.
This flight of capital in search of a quick score actually benefits the mining sector by clearing out “the clutter” on the bottom rungs, Mr. Rule says.
“The exploration business in Canada, among other sins, wastes way too much money on listing fees and general and administrative expenses,” he says, noting that the average small listing eats up $500,000 a year in expenses.
If, as a consequence of the competition with cannabis for funding, “you were able to kill 100 hyper-marginal exploration listings, you would save the industry $50-million a year. That would be very helpful for the mining business as a whole, because we need many, many fewer listings, so that the remaining companies … have to compete less vigorously for real mining investment.”
Indeed, “the bedrock of investment” by market participants focused on mining’s improving fundamentals remains unchanged, says Phil Hopwood, head of Deloitte’s global mining and metals group in Toronto.
The selling points include continuing debt reduction, lower operating costs and the likelihood of higher prices down the road for copper, lithium and other metals facing supply constraints amid surging demand from builders of electric vehicles and charging-station infrastructure.
Those constraints seem certain to drive further consolidation in the industry, as producers seek to add high-quality reserves through acquisition rather than the expensive and lengthy process of exploration and development. This, in turn, will enable smaller operators to reduce their own risks and capital expenditures by purchasing non-core assets cut loose by the merged heavyweights.
Some will be looking to issue new equity or to find other means of paying for those deals. But even without the cannabis haze hanging over the market, they have had to become much more creative at playing the finance game during several lean years.
This could involve putting together a diverse mix of equity, bank loans and infusions from deeper-pocketed producers, wealthy Asian and institutional investors or streaming companies, which provide capital in exchange for minority stakes or royalty positions.
“You put that all together and you have a multifaceted strategy in terms of raising investment,” Mr. Hopwood says.
Government assistance such as Ottawa’s mineral exploration tax credit, which boosts the appeal of mining startups to equity investors, also plays a role in what Mr. Hopwood describes as Canada’s “very healthy exploration culture.”
The federal government announced in November that it would extend the tax credits for five years to 2024, after previously opting mostly for annual renewals since introducing the investment enticement on a supposedly temporary basis in 2000 during a steep decline in exploration activity. The industry has long sought the multi-year commitment to boost investor confidence and make it easier for exploration companies to raise capital.
“I don’t think that’s going to drive much of a change, but it certainly does keep some activity going within the Canadian marketplace,” Mr. Braunsteiner says.
Some struggling publicly listed mining companies are pursuing cannabis cash for themselves. The idea is to goose their stock price by adding a weed-based asset to otherwise underwhelming resource portfolios.
Matt Shalhoub, managing director at Green Acre Capital in Toronto, says he and other cannabis specialists are being approached for advice on acquisitions and investments by promoters who previously devoted their efforts to raising capital for mining projects. “They’ve been actively pursuing opportunities in cannabis, because they identify that this is a sector that has taken a lot of the investor dollars” that used to go to resources.
Meanwhile, resource companies that prefer to stick to their own field can take comfort in the certainty that cannabis is sure to lose some of its appeal once investors’ dreams run into harsh market reality. Which may already be happening.
Last year’s IPO activity was driven in part by U.S. entrants seeking listings in Canada. “I think that story is getting a little bit old,” Mr. Shalhoub says. “The valuations that these companies were getting were way too high. A lot of them haven’t traded that well out of the gate.”