VANCOUVER (miningweekly.com) – Despite signs of improved investor confidence in Canada's prolific junior mining sector – mainly driven by rising consumer technology demand for resources – analysts are warning that the market recovery is in a delicate phase and will require discipline to survive until more substantial commodity price increases occur.
Professional services firm PwC Canada on Monday released a new report entitled 'Junior mine 2017: Confidence rekindled', which pointed out that the market capitalisation of the top 100 junior mining companies on the TSX Venture Exchange hit C$12.2-billion for the year ended June 30 – up 7% year-on-year from C$11.4-billion a year earlier.
The rising number of exploration projects, equity and debt financings, as well as mergers and acquisitions (M&A) all led to the sector's best performance of the past five years, PwC stated. Rising consumer demand for electric vehicles, mobile electronics and power storage — technologies that are dependent on old metals like nickel, lithium and cobalt— also contributed to the sector's overall improvement.
"When it comes to future growth in the junior mining sector, strengthening global economic conditions today bode well for higher commodity prices, but without inflation it may prove difficult for junior miners to maintain their positive momentum. Junior miners seem to understand that this is a period of delicate recovery and are taking a more disciplined and strategic approach," said Liam Fitzgerald, PwC Canada's national mining leader.
According to the report, upward trends in cash balances and deal activity are key indicators that the sector has moved into a delicate recovery period of "cautious optimism".
Cash balances of the top 100 improved 74% during the 12-month period to C$1.57-billion, the largest amount in the last five years. The cash increase happened even as the group as a whole boosted its spending on exploration, development and mergers and acquisitions. Outflows rose to C$1.15-billion, up from C$268-million a year earlier.
The amount of money raised through equity soared to C$2.04-billion, up 174% from C$746-million in the year-earlier period. Debt raises had a smaller increase year-on-year, rising to C$487-million, up 20% from C$405-million in the same period a year earlier.
PwC said that the average market cap of the 64 exploration companies rose 8%. Production companies saw their values increase an average of 59%, and development-stage companies suffered an average decrease of 10% in market cap as more players entered this space.
While optimistic, investor enthusiasm remains selective, indicating that the sector has not fully recovered from the downturn, the firm advised.
The report found that the combined valuation returned to 2010 levels, but underperformed the TSX-V market overall, which gained 33%. However, mining remains the dominant industry on the exchange, accounting for 47% of the total value in 2017.
The report cautioned that the recovery cycle would remain "choppy" and would be driven by rising commodity prices.
"The link to commodity pricing has been apparent in several cases such as metallurgical coal growth, due to robust demand for steel in Asia. Copper and zinc prices saw consistent increases year-on-year, and gold managed to sustain the gains it posted in 2016, due to the anticipation of rising inflation in the US and growing geopolitical uncertainty," PwC said.
One of the reasons members of the top 100 failed to keep pace is that gold prices levelled off during the year, staying within a tight range of $1 200/oz and $1 300/oz, and two-thirds of the top 100 miners have exposure to the precious metal. That story could change over the next year if the US Federal Reserve and other central banks further tighten monetary policy, a move that could send gold prices higher.
The price of copper rose 22% during the 12-month period, and if it maintains recent levels near or above $3/lb, copper miners could have a more prominent place in next year’s ranking of top juniors.
"In the two years since most metal prices began a slow climb off their lows, cautious producers have built fewer new mines than normal. This could underpin commodity prices and help the broader junior mining sector raise more funding for exploration and development," added Fitzgerald.