Introduction: Bumping along the Bottom

Mining is a tough game with risks and rewards that are magnified in the junior segment. From 2002 to 2011, it was roses all the way with rising global exploration spending, myriad new listings on the Canadian TSX Venture Exchange (TSX-V) and a sector awash with investors willing to wager on finding the next big discovery. In 2012, despite record high metals prices the previous year, the junior mining sector saw a dramatic turnaround in investor sentiment: the top 100 TSX-V mining juniors, as measured by PwC in its annual Junior Mine report, experienced a 52% decline in debt and equity financing. By 2015, the supercycle hangover has become a state of play and the plight of junior explorers is likely to get worse before it gets better.

Ongoing investor aversion continues to be the principal threat to the sector. Many poor quality projects obtained financing during the high price cycle, leading to losses for traditional institutional and retail investors. These players are now understandably wary of investing again and the exit of this speculative risk capital has been a shock to the system. Many companies have been forced to leave the sector altogether, some have turned off the lights until conditions improve and others have seen buyouts or turned to mergers and joint ventures to survive the downturn. The past couple of years have also seen the emergence of alternative financing options such as private equity, private placements, and streaming and royalty agreements.

Well-managed companies with high-quality assets in stable geographical locations can still raise cash, but most early-stage projects will not get the money they need to prove the quality of their assets and this will lead to an eventual lack of new mineral discoveries - the catalyst for the next upswing in the sector. "Solid projects and people continue to be able to raise money. However, nearly all is for advanced projects and there is virtually none for grassroots exploration," says Brent Cook, veteran economic geologist and mining stocks analyst.

For seasoned industry players, this is the classic boom and bust cycle. At the height of the boom, spurred by voracious Chinese demand, there were more than 3,000 junior miners listed and receiving financing on the TSX-V, a public venture capital marketplace for emerging companies. As of September 30, 2015 this had declined to 1,101 companies. Mining analyst John Kaiser says the universe of Canadian resource juniors could shrink to about 400-500, as more companies "will end up bankrupt and reorganized as shells for other sectors or just fade away."

"I suspect we will see more companies go under, but there is a surprising resilience in these small caps that get just enough financing to stay listed," says Cook. "We are bouncing along the lows... we may see it get a bit worse into early 2016, but not appreciably so."

EY Canada Mining & Metals leader Bruce Sprague also points to the capacity of juniors to weather the storm. "It's a hallmark characteristic of the industry compared with other sectors. Some of these guys have been around for 20 years or more and have seen at least a cycle or two," he says.

In the meantime, juniors determined to survive the downturn are getting more resourceful. "They are hunkering down, trying to be creative, turning to private placements, looking to curry interest from private investors in a stake," Sprague says.

An increasing number of juniors with new mining projects are likely to remain private rather than go public. Indeed, going public and the modus operandi of the TSX-V junior mining segment has been called into question by several industry analysts during 2015. Some see the disappearance of so many listed mining juniors as a natural culling process that will serve to strengthen the sector, but others warn of a structural shift that could change the way juniors and investors interact, impacting the entire mining sector chain.

"The key problem is the destruction of the resource junior stock exchange as a gambling casino for which the financial sector is no longer willing to serve as a gatekeeper," Kaiser says. "We are not going to see an institutionally driven inflow of capital based on higher metal prices for a long time, unless gold does a breakout which is only conceivable for bad reasons not conducive to gambling in juniors."

Any positive shift in market sentiment is likely to be gradual and the ride will be bumpy, so the practical benefit for junior explorers will take some time to be felt. The fact that grassroots exploration is suffering the most from the lack of investor interest, and that this situation is likely to be prolonged, will have profound consequences for future metals supply.

Figure: Evolution of the Gold Price

Figure: Evolution of the Copper Price


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