After years of wrestling with weak commodity prices, battered balance sheets and inhospitable equity markets, a healthier mining industry is once again finding wary investors more receptive to its stories of growth and discovery.
The shift in sentiment was apparent last year, when 20 Canadian mining issues – more than half the total initial public offerings for all industries – were floated on Canadian exchanges. Six came to market in the final quarter alone. Even a handful of junior players joined in the equity hunt after largely sitting on the sidelines for the previous five years.
About $830-million poured into Canadian-based miners' coffers, the highest total in seven years.
This year promises more of the same, and for much the same reasons that sparked the revival in the latter half of 2017 after a dismal 2016, says Dean Braunsteiner, PricewaterhouseCooper's national IPO leader.
Mining companies have spent the past few years retrenching and getting their financial houses in better order, rather than spending on development and exploration. But now as prices strengthen, the industry is turning its attention to filling depleted pipelines.
The quest for capital is being fuelled in part by a strong recovery in base metals such as copper, zinc, cobalt and lithium. The sales pitch centres on demand for electric vehicles, whose batteries are made with the latter two metals, while research has shown that zinc could be used as a substitute.
"It certainly looks like there's going to be a shortfall of those particular commodities," Mr. Braunsteiner says. "Companies that have those properties are primed to [raise more] equity to bring them into production – or do spinouts, if those assets are not core."
Still, not even the optimists are predicting a return to the halcyon days of 2010, when skyrocketing commodity prices and a huge investor appetite for resource stocks enabled mining companies to rake in more than $1.3-billion from 52 initial public offerings in Canada.
But the grim years of belt-tightening that followed actually turned out to be a blessing in disguise. During the boom, resource stocks were so hot "that the industry and the investment banks didn't have to be particularly creative in terms of raising capital. The capital was coming to them," says Rick Rule, chief executive of Sprott U.S. Holdings Inc. in San Diego.
The departure of investors who often had scant knowledge of resources forced the industry to look for capital elsewhere, Mr. Rule says.
Today, "there are diverse sources of funding in the industry that I haven't seen in my career, which goes back 40 years."
Mining firms "would prefer dumb money to smart money. And the money that's around now is smart money," he says. "Which means that it is price- and performance-sensitive. It's an inconvenience. … But the truth is that the industry requires and is getting adult supervision. So it's a very good thing."
The public financing successes of 2017 included some quality projects and themes that captured the market's attention. That was the good news.
The bad news? "Too much money probably went to so-called hot commodities" like cobalt and lithium, Mr. Rule says. "Money is usually allocated best to commodities that are out of, rather than in, favour," he says, citing uranium and potash as examples.
Nevertheless, 2018 is shaping up as a good year on the public financing front. "My own suspicion … is that sectors respond to positive surprises. The expectation that investors have for the mining industry is so low that it would almost be impossible for it to underperform. It will be a challenge to get under the bar, rather than over it."
But what if the markets face a prolonged stretch of volatility marked by wide price swings and intense bouts of selling?
Mr. Rule, for one, thinks that's exactly what could be in store, at least for a short period. But he notes that resource stocks are well-positioned to weather such dangers. "One advantage that commodities might have in particular over general equities is that many commodities are still priced at a discount to their cost of production."
And if volatility persists or nervous global investors worry about what dreadful things could happen to their U.S. dollar assets on President Donald Trump's watch, there's always that tried and true shelter in a financial storm – gold.
Major gold producers, operating with more disciplined management and stronger balance sheets than they have had in years, don't face any serious capital shortages. Junior players are always in need of additional cash, but they likely won't be rushing to the market for a lot of new financing this year either, even if bullion prices continue to improve.
"While gold has lifted, it hasn't lifted enough that it's attracted mainstream investors," says veteran gold analyst John Ing, chief executive with Maison Placements Canada Inc. in Toronto. "They are still playing marijuana stocks, bitcoins and chasing other hot volatility groups."
The TSX gold index is still stuck in neutral. "My sense is that you have to get bullion above the $1,400 area in some big moves," Mr. Ing says. "And then you'll get the investor coming back."
The junior miners aren't waiting around for them to return. Instead, they have been turning to senior or mid-size producers, streaming companies or other sources of capital in exchange for minority equity stakes or royalty positions.
Interest is picking up, "so I think we'll see more money raised by gold companies in 2018," says Nolan Watson, chief executive of Vancouver-based Sandstorm Gold Ltd., which provides financing to gold mining firms in exchange for royalties or the right to purchase a share of the production.
The broader industry trend is certainly headed in the right direction. Global spending on exploration climbed last year for the first time in five years. Canada remains the leading destination, accounting for US$1.1-billion, nearly 14 per cent of the exploration pie, according to a report by SNL Metals & Mining.
Spending in Canada is up 12 per cent year over year, with juniors accounting for all of the increase, the report says. Close to two-thirds of the Canadian total has been earmarked for gold.
"When you see activity like this, there is almost always pressure to IPO to raise capital and develop the assets," says Phil Hopwood, head of Deloitte's global mining group. "Given the recent bull run in commodities like zinc, nickel and copper, as well as continuing favourable conditions for coal – not to mention the emerging 'commodities of the future' [cobalt, lithium, graphite] – it is not surprising to see the increasing activity around IPOs."