The Crystal Ball is Not So Clear: Revisiting the Future of Canadian Mining

This guest post has been authored by Tammy Thompson, Partner, BDO Eastern Canada Natural Resources Leader and David Roux, Associate, BDO Canada LLP. They can be reached at [email protected] and [email protected], respectively. Around this time last year, financial analysts predicted that the junior mining industry in Canada would experience a severe decline in the wake of falling commodity prices, increased costs, lack of funds and shy investors. The “crystal ball” may have been a little blurred. One year later, this prediction has not come to full fruition. While the junior mining industry has seen a decline, it appears it is not as dire as originally anticipated. There have been 27 de-listings from the TSXV between December 2013 and January 2014. Of these 27, 13 were in the mining industry: one was a result of insolvency, two were a result of moving to the CNSX, one was a voluntary liquidation, one was inactive, one failed to file since 2012, and seven arose from mergers or reorganizations. From these recent statistics, it would seem far fewer mining companies have disappeared than predicted, and instead, there appears to be a trend toward consolidation in the industry. As Bruce Gordon of BDO Australia noted in his blog post last January, there has been and will continue to be increased merger and acquisition activity as the industry focuses on reducing costs and increasing efficiencies. Similar to Australia, we believe Canada will see more distressed mergers and acquisitions on the eve of the return of investor confidence. This may be the new future of the junior mining sector: a smaller number of larger explorers feeding the needs of the Majors. Another concern for junior mining companies has been the lack of traditional financing. Of the approximately 359 junior mining companies listed on the TSXV with a market capitalization below $25 million, a share price below $0.05 and less than $200,000 in working capital, 96 have raised funds through private placements in the last six months. Together, they have raised approximately $33 million, but at an average of only $350,000 per company. This suggests that much of these funds are coming from existing investors, allowing them to protect the company from insolvency while increasing their equity stake with limited investment. From what we’ve observed, the low share prices allow mining companies just enough funding to survive and keep their best properties in good standing, but unfortunately not enough to carry on the exploration so vital to the advancement of the industry. Traditional funding still seems to be in place to sustain the existing organizations; however, it may no longer be adequate to fuel growth. Although some of the warnings for the industry may still prove true, there may be cause for cautious optimism about the future. The mining industry in Canada has been around for decades and has seen many highs and lows along the way. Miners have repeatedly demonstrated their ability to adapt through these cycles, and we believe this current cycle will shape how the industry does business in the future. Recently, the Canadian government announced it has extended the flow-through share and the mineral exploration tax credit programs. As the industry moves toward recovery, we expect to see traditional private placements continue together with the increased use of convertible debentures and rights offerings to sustain the industry. That expectation, combined with the inevitable and necessary consolidation of the industry through mergers and acquisitions, will facilitate the continued survival of the junior mining industry. Economic change is upon them, but they appear to be up to the challenge. When looking through the “crystal ball” of mining and predicting future outcomes, it is important to remember mining is inherently a long game, with a “fast track” mine taking at least 10 years from exploration to opening. Short-term cycles in the market don’t necessarily affect the long-term prospects for the industry significantly. The world will always need the products of the mining industry, and therefore it is inevitable that recovery is on its way. With a trend toward consolidation, junior mining acting as asset feeders to the Majors and the need for non-traditional sources of funding, it is difficult to predict what the future will hold.

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