Junior miners seek funding from seniors as bought deal popularity fades

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Junior mining companies are increasingly turning to senior firms for capital, as traditional bought-deal financing becomes a riskier gambit in a difficult market for commodity plays.

Bought deals, which see investment dealers purchase stock from an issuer at a discount and then flip those securities to third-party investors, are getting harder to pull off. It's a trend that is especially evident among junior miners – those most in need of equity capital.

Last year, even in the midst of a rebounding initial public offering market and a buoyant environment for mergers and acquisitions, the value of mining bought deals cratered.

Canadian companies raised $3.3-billion in secondary mining financings in 2017, down 44 per cent from $5.9-billion in 2016, according to data from Thomson Reuters.

"Traditional capital raising in the mining sector is a much more difficult proposition," said David Cobbold, head of mining investment banking with Macquarie Capital Markets Canada Ltd.

"A lot of the generalist money is not in the mining sector right now and the mining funds have smaller assets under management."

As demand from institutional investors has dropped over the past five years, bought deals have become a riskier proposition for investment banks, which take on the risk of selling stock and can get stuck holding unsold securities if deals don't sell out. (Corporate issuers are paid in full, even if bought deals do not sell.) Not only is less capital being raised through bought deals these days, companies have to offer steeper stock discounts to woo investors, meaning the cost of capital is going up.

Against this backdrop, senior mining companies have been stepping in to help fill the funding void through so-called "strategic investments." In such scenarios, a large-cap miner typically makes a minority investment in a small company with an exploration and development project. Seniors also usually get a say in running the junior through a board seat.

According to data compiled by Macquarie, $598-million was raised last year through 41 separate strategic investments into Toronto Stock Exchange-listed mining companies. Those transactions saw seniors such as Goldcorp Inc., Barrick Gold Corp., Newmont Mining Corp. and Agnico Eagle Mines Ltd. either initiate or add to positions in juniors.

CIBC World Markets Inc. has also noticed a big change in how small Canadian mining companies raise capital. The investment bank looked at the breakdown of equity capital raised for junior precious-metals companies over the past four years, specifically the percentage raised from public stock offerings versus strategic investments. In 2016, the mix was 83 per cent public, versus 17 per cent from strategics – a breakdown that hadn't changed much since 2014. But last year, 54 per cent was raised publicly, versus 46 per cent through strategics – "a significant change from prior years," said Chris Gratias, global head, mining investment banking with CIBC.

As much as exploration and development companies require this new source of capital, seniors also have good reason for making these investments: The need to replace dwindling reserves. Barrick Gold, for example, has seen its total proven and probable gold reserves fall by more than 50 per cent since the end of 2011.

Over the past five years, the global mining industry has pared back investments in new developments. For seniors who can't replace reserves internally, a strategic investment in a junior is seen as "another form of exploration spending," Mr. Gratias said.

While strategic investments can be done for simple investment purposes, they also tend to make any future takeover of a junior by a senior company cheaper over the longer run.

Fewer bought deals eats into a lucrative revenue stream for investment banks, but typically dealers still get paid a fee for providing advice to companies who pursue strategic investments.

Nobody is predicting the death of the bought deal – which was pioneered in Canada in the 1980s, but it is far from the the only funding game in town for miners any more.

This is part of the Report on Business annual Big Deals package of stories and tables about financing and investment banking, including the winners of the 2017 Canadian Dealmakers awards.