Exploration Hub

Guest Post: The search for certainty in a time of uncertainty

March 11, 2020

The mining world met in Toronto last week at PDAC. The Prospectors & Developers Association of Canada is the largest mining conference in the world. Even with the potential risks that the coronavirus threatens the world with, this year the conference brought together 23,000 people from all corners of the globe to discuss the outlook of our sector for 2020. This week we thought it would be interesting to share with you an excerpt from an article published by Canadian business law firm Osler1. As a corporate lawyer Osler brings an objective point of view on the market sentiment and the strengths and weaknesses of the mining sector, specifically exploration, at this time:

Video by Penda Productions

The juniors are not all right

The junior end of the market continues to struggle. Access to capital is limited for exploration, and has been for some time. The PDAC’s State of Mineral Finance continues to paint a fairly dismal picture. Early stage exploration is most limited. Though private equity on the whole continues to increase its war chests and available capital, its focus is almost entirely oriented towards producing or near term production stage assets. There are fewer sources of capital willing to invest in mining, and capital is selective and becoming more so. 

The majors, having stabilized their balance sheets over recent years, are continuing to provide a source of exploration financing through equity investments and joint ventures. This represents a key source of potential capital for many junior issuers given the lack of other available financing alternatives. Although a few financings have been announced and completed in 2020, continued uncertainty due to coronavirus is unlikely to be constructive for raising capital over the near to medium term for issuers other than the already well-capitalized majors.

The sector faces an interesting paradox: the only companies who have access to capital are the ones who don’t really need it.

Declining discovery rates

Another continuing theme focused on the significant need for compelling discoveries. This goes hand in hand with the state of junior exploration companies, as junior companies have traditionally been responsible for a disproportionate number of new discoveries. While what constitutes a “discovery” is somewhat subjective, evidence suggests that the rate of discoveries has been falling for years. No one has an answer for how to remedy this phenomenon when the market will not currently support exploration activities. In the meantime, we expect major companies to continue to support select exploration companies through strategic investments and joint ventures. The ongoing strength of the market for royalty interests (both new financing and portfolio trading) is helpful, as it provides a means for junior companies to dilute to a royalty while still preserving value.

But this selective financing will not save the entire ecosystem of junior companies, and major companies are prone to their own financial pressures to return capital to shareholders and demonstrate profitability.

Evrim’s takeaway

 As a mineral explorer, we feel first-hand the pressure from the market to stay financially healthy while not diluting our stakeholders and at the same time, adding value to the company. One must be strategic to stay in the game, and looking for joint venture partners to fund our exploration programs has proven to be a good strategy, especially in times like these when, as Osler puts it, there are fewer sources of capital willing to invest in mining.

And now, seeing one of our gold-silver projects (Ermitaño) that we generated and ultimately sold to a leading silver producer head towards production further validates our model. Becoming a cash flowing company through our 2% net smelter royalty on the Ermitaño project gives us an advantage over other explorers, as the pressure to go back to the market to raise capital is no longer imminent. Organic royalty generation is a unique part of the joint venture business model that allows Evrim to grow beyond its current value proposition.

 

1. Excerpt from blog post published by Osler on Mar 9th, 2020: https://www.osler.com/en/resources/regulations/2020/pdac-2020-the-search-for-certainty-in-a-time-of-uncertainty