Canadian junior miners losing out to cannabis companies – BDO Global
JOHNNY-COME-LATELY investors that were traditionally attracted to the junior mining space have a secondary option, where the valuations are higher and forecast demand is reportedly worth billions
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Equity markets have “fallen out of love with junior miners” of late as investors have been lured to other sectors, especially cannabis stocks, notes a report by auditing and business advisory firm BDO Global partner Sherif Andrawes.
The analysis, released last week, notes that investors that were traditionally attracted to the junior mining space have a secondary option, where the valuations are higher and forecast demand is reportedly worth billions.
Andrawes’ report notes that investments in Canadian marijuana companies increased from C$43-million to C$770-million from the first half of 2016 to the first half of 2017, a massive surge year-on-year.
In his analysis, he points out that the cannabis industry is the trend du jour, with a promise of growth and returns that has investors “enamoured.”
While he hesitates to attribute the downward trend in investment for Canadian juniors to cannabis alone, owing to several “scathing reports” from analysts looking at the other challenges plaguing Canadian juniors, he does note that cannabis companies account for a significant portion of the redistributed investment.
Andrawes notes that the reality is that obtaining funds from equity markets is becoming more difficult for junior miners, with the number of listed mining companies on the TSX and the TSX-V declining by 25% from 2017 (69 listed companies) to 2018 (55 listed companies).
The total market share of mining companies on the TSX-V declined from 45% in December 2017 to 35% in January 2019, while Life Sciences has grown from 13% in December 2017 to 19% in January 2019, of which cannabis companies, alone, account for 13%.
“More evidence to indicate that juniors are finding it hard to secure equity is their declining number of financing transactions on the TSX-V, which saw a 25% decline in 2018. We also note that [the financing of] juniors . . . decreased by 58% for the TSX and 23% for the TSX-V from 2017 to 2018,” the report states.
Andrawes refers to a comment that junior mining analyst John Kaiser made in the Canadian business newspaper Financial Post in 2014: he suggested that cannabis could ignite “an institutional, structural collapse [for junior miners] at multiple levels”.
Andrawes’ report suggests that the Canadian stock exchanges seem to demonstrate a “perfect storm of synchronised industry movement” that might result in a fundamental change where juniors will need to seek funding elsewhere.
“The problem of declining investment in exploration is the risk that demand will ultimately outstrip supply, causing price spikes and market volatility,” he explains, adding that forecast demand for metals will “inevitably go up”, as the world is driven by the electrification of industries.
“However, without junior miners being able to secure the right capital, the industry will forever be stuck in the boom-bust cycle.”
The report notes that exploration expenditure has been increasing, despite the mining sector’s difficulty in raising funds. Andrawes adds that even this positive trend is tinged with the fact that the increased spend has been on brownfield projects rather than greenfield projects.
“It appears that companies with more advanced projects, where the risks are lower, are finding it easier to attract risk capital,” the report says.
It stresses that, if new greenfield projects are not being explored this will reduce the number of new projects that will be developed in the future, which would cause a glut in the market.
Andrawes notes that, as there is compelling evidence that risk capital has “found a new home”, the question now shifts to how and where junior miners will find the capital they need to sustain their businesses.
He notes that BDO attended the Prospectors & Developers Association of Canada (PDAC) event last month, where discussions explored possible alternative funding sources, including moving away from Canadian exchanges to the exchanges in London or Australia.
A shift to other exchanges might be feasible, given the relative maturity of the Canadian junior mining sector, which has in excess of 1 000 junior mining companies.
Andrawes adds that commodity streamers and royalty investors were “very” visible at the PDAC event and that, while there is a perception that these types of ventures offer “a very expensive option” for juniors, in some cases, it may be the only option.
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