Toronto continues to be the investment engine of global mining, despite new competition from cannabis, blockchain and cryptocurrencies.
Toronto is the financial heart of the mining industry, spearheaded by the Toronto Stock Exchange (TSX) and TSX Venture, which together accounted for 59% of all global mining financings in 2017. Almost 56 billion mining shares were traded in 2017, with a total value of C$206 billion, and there was tangible evidence of renewed investor confidence, illustrated by one of the largest mining IPOs in TSX’s 165 year-history, as Nexa Resources raised over C$730 million in Q4.
The attractiveness of Canada as a destination of choice to list companies in the mining space is also enhanced, in the case of exploration companies, by the country’s FTS (Flow-Through Share) program. Introduced by the federal government in 1972, this is a tax driven structure that allows an individual or corporation to invest in a Canadian exploration company and receive the tax benefit from those expenses being spent on the ground for exploration. Rubicon Minerals utilized the FTS program to raise C$10 million in March 2017, and C$10M in February 2018, to help fund exploration for their Phoenix gold project at the Red Lake Camp in north-western Ontario.
There are currently four ways companies can list on the Toronto stock exchanges: Capital Pool Company programs (CPCs), IPOs, dual listings and reverse takeovers (RTOs). Since the introduction and success of the CPCs, the Special Purpose Acquisition Companies (SPACs) concept was introduced – the TSX version of the CPC shell concept.
The Capital Pool Company (CPC) program introduces experienced investors to entrepreneurs whose growth and development-stage companies require capital and public company management expertise. Different to a traditional IPO, the CPC program enables seasoned directors and officers to form a Capital Pool Company with no commercial operations and no assets other than cash, list it on TSX Venture Exchange, and raise capital. The CPC then uses these funds to seek out an investment opportunity in a growing business. Dean McPherson, head of business development and global mining at the TMX Group, expanded on the benefits of the CPCs: “The CPC program has been a huge success for TSX, with 2,464 created since the start of the program, 87% of which have completed qualifying transactions. Currently, we have 78 CPCs trading on TSXV.”
Dean pointed to the qualifying transaction made by Brazilian based company Sigma Lithium in May 2018 as a recent example of this alternative way to list.
The return to dual listings was another indicator of the global upswing: “Companies listed on the LSE or the ASX are looking to our Exchanges to access over US$20 trillion in investor capital,” continued McPherson. “The last time we saw any significant IPO activity was 2012, so there is a general enthusiasm returning to the marketplace.”
The TSX and TSXV have been complemented by the rise of the Canadian Securities Exchange (CSE), which announced that the first half of 2018 was the strongest six-month period in its history, with significant increases in number of listings, trading volume and value traded compared to the same period in 2017. By the end of August 2018, the CSE had reached just under C$2 billion in issuer financing, with the mining sector accounting for the second largest number of new issuers, behind the booming cannabis space, according to Richard Carleton, CEO of the CSE.
In 2019, the CSE plans to introduce a blockchain clearing and settlement system that will provide listed companies a venue to list and trade tokenized securities. As transactions occur on the exchange, they will be cleared and settled instantaneously, solving one of the challenges for junior and mid-size companies in terms of the non-dilutive effect it will have for existing shareholders. Carleton explained: “This will mean dealers will not have to fund open-position during the settlement period that we currently have, which will reduce the friction that currently exists for companies paying dividends, royalty streams, splits or consolidation distributions to shareholders.”
Up in smoke: the legalization of cannabis
Despite the renewed sense of optimism surrounding the investment climate for mining, competition for funding has become fiercer than ever with the seismic impact of three new industries – cannabis, cryptocurrencies, and blockchain. Since cryptocurrencies peaked in January 2018, digital assets have crashed, losing around US$600 billion in less than nine months. Bitcoin, the first decentralized cryptocurrency, fell from a peak of US$19,650 in December 2017, to US$3,750 in November 2018.
Cannabis, however, has gone from strength to strength, exemplified by the US$3.8 billion investment made by Fortune 500 alcoholic beverage company Constellation Brands in Canadian cannabis company Canopy Growth in August 2018. In November 2018 Canopy Growth, a company founded in 2014, had a market cap comparable to Barrick’s, highlighting the scale of the impact the cannabis industry has made.
Pat Dubreuil, president of Ontario-based junior Manitou Gold, which announced a C$1.4 million equity financing in August 2018 following its 25% acquisition of the Goudreau-Lochalsh deformation zone (GLDZ belt) in 2017, believes it is a matter of time before investors come back to the commodity market. However, he is under no illusions as to where the attentions of the market are currently focused: “During a recent TSX course I attended, around 80% of the 250 people attending were from new cannabis companies to be listed on the stock exchange.”
Dean McPherson echoed this sentiment: “The uptick in mining financing has been slower for the junior sector given that new sectors, such as cannabis and blockchain, have caused a distraction and taken some of the risk capital out of the marketplace.”
Executive vice president of IBK Capital, Adam Schatzker, sees the capital created by cannabis, cryptocurrencies and blockchain companies as an opportunity rather than a distraction, recognizing: “Mining is notoriously cyclical and can actually benefit from the great wealth being created from these new industries… Years ago, the dot-com boom took investment away from the mining sector, which was later reinvested into juniors when equity metal market conditions improved.”
Denis Frawley, founding partner of Toronto law firm Ormston List Frawley LLP, likened the cannabis boom to a magnet, pulling in capital, focus and talent. He suggested that rather than trying to compete with the momentum of this new industry, junior mining companies should present themselves as attractive options for the investment of the vast amount of new wealth being created, explaining: “Investors will want to diversify their holdings, and many of them here in Toronto have deep knowledge and expertise in the mining industry, so will be open to interesting opportunities.”
Financial services in the city
If the Toronto stock exchanges provide the platform for junior mining companies to raise capital, it is the financial service institutions in the city that orchestrate the transactions. Companies such as IBK Capital, Sprott Asset Management, Franco-Nevada, Dundee Corporation, and Mackie Research Capital, all headquartered in Toronto, provide the backbone of the financial district that anchors both the Canadian economy and the global mining industry.
Dundee Corporation is one of the heavyweights of international mining finance. Founded by Ned Goodman, one of Canada’s most successful investment leaders, Dundee has invested billions of dollars into the mining industry since being established in 1957. Jonathan Goodman, Dundee’s current chairman and CEO, noted that as only 25% of mines make money during a mining cycle, investors need to be selective and analyze a variety of factors and data to determine whether or not an investment opportunity is solid: “Mining investment does not only require strong geology, but a company with a strong board. Mining is more than just drilling, it is a synergy between engineering, community relations and design,” he added.
In 2016, Shaun Usmar decided to leave his role as senior executive VP and chief financial officer at Barrick Gold and establish Triple Flag Mining Finance. Triple Flag’s first deal was a C$250 million silver streaming deal with Nexa Resources on its Cerro Lindo mine, followed by bilateral deals with Steppe Gold and Nevada Copper, and more recently a C$200 million deal to acquire an extensive royalty portfolio from Centerra. When asked how Triple Flag has managed to compete with established players in the financial services sector, Shaun responded: “We have experience and knowledge within the mining industry, with a large and sophisticated financial backer (Elliot Management Corporation) that enables us to offer beneficial services at a competitive cost of funding to prospective partners.”
Another new player making waves in the market is Cobalt 27, a company established with the aim of creating a platform that gives investors exposure to the electric vehicle (EV) space. After going public in June 2017, Cobalt 27 exercised 16 contracts and bought the world’s largest physical position of cobalt outside of the Chinese government, worth over C$300 million today. Since then, the business has evolved from a physical starting point into a royalty and streaming entity, highlighted by the C$300 million deal which saw Cobalt 27 buy a percentage of the cobalt production from Vale’s Voisey's Bay mine in Labrador.
Justin Cochrane, president and COO of Cobalt 27, is bullish about the fundamentals of cobalt and nickel: “For the rapidly increasing EV market, three times the amount of cobalt will be needed to service demand. For nickel, the market will have to double in size. I believe that analysts tend to underestimate how quickly people move from one technology to another, and the industry is most definitely moving towards sustainable EVs,” he stated.
Finally, as CEO of Victoria Gold, Chad Williams, founder and current CEO of Red Cloud Klondike Strike, felt that there was a distinct lack of strategic advisory services dedicated to mining from a financial standpoint. Since its establishment in 2012, Red Cloud has helped over 400 mining companies raise funds, complete M&A transactions, and market assets, among a variety of other services dedicated solely to the mining industry. Despite entering the market at the start of a downturn, Red Cloud has increased its revenues by an average of 50% per year since its inception.
Williams divulged one of the tactics that has been successful for Red Cloud: “We often take shares in the companies we provide services for, as a form of compensation. This has been extremely lucrative, even in a challenging market,” he explained.