Dec '15/Jan '16

The year ahead: Dealing with the downturn

How miners are coping with low commodity prices

By Ryan Bergen, Christopher Pollon, Katelyn Spidle | Illustrations by Cai Sepulis

Bundle up against the elements

As the downturn has continued, several junior and mid-tier companies have opted for friendly mergers as a way to weather the storm. In early November, Oban Mining announced it would acquire Northern Gold, a junior miner with advanced and prospective projects in northern Ontario. The agreement came three months after Oban acquired Eagle Hill, Ryan Gold and Corona Gold, and closed a private placement agreement with Osisko Gold Royalties.

According to the recently published PwC report Junior Mine 2015: Time for Change, aggregation can offer junior miners many benefits during a down cycle. There are lower administrative costs since aggregated companies only need one head office and management team. They can also share risks and adjust balance sheets, which strengthen the company’s position. Most importantly, aggregation can keep a company’s assets safe and preserve shareholders’ potential.

For John Burzynski, president and CEO of Oban, choosing the right junior companies to consolidate now will position Oban for success in the future.

“We’re looking at development-stage projects, and our intent is to get the development projects in the land positions that we like,” said Burzynski, who started the company five years ago as a side venture to the former Osisko Exploration, which he cofounded in 2003. After Osisko sold to Agnico Eagle in 2014, Burzynski cocreated Osisko Gold Royalties.

Senior companies are trying to fix their broken balance sheets by selling royalties and streams, something that Burzynski said he believes makes right now the perfect time to be starting a mining company. By acquiring assets while everyone is a seller, companies like Oban can ensure progress for years to come.

“We’re well-financed and when the market does turn, we’ll be coming up with the next generation of mines,” he said.

Eric Moeller, president and CEO of Northern Gold, decided to merge because Oban could provide Northern Gold’s shareholders with the opportunity to own Oban shares at a reasonable price and grow their investment.

He said he believes that any time is a good time for a junior company to consider an aggregation strategy, however, for juniors who want to develop a project during the current downturn, aggregation may be their only chance for survival. Moeller said he thinks it will remain difficult for junior companies to stay afloat even after the market rebounds, as the entire infrastructure for funding mining projects will have to be rebuilt.

“Those companies that are successfully consolidating now will be stronger and better positioned for the future turnaround,” he said.

And it is not just juniors who are turning to aggregation to stay alive. Over the summer, Alamos Gold and AuRico Metals merged to form the new intermediate company Alamos, and First Majestic announced a friendly acquisition of SilverCrest Mines.

– Katelyn Spidle

Trim the fat

While juniors and mid-tier companies huddle together for warmth, major mining companies are shedding extra weight. Barrick Gold announced in November that it sold several non-core assets in Nevada for US$720 million in cash. These recent transactions brought the net worth of Barrick’s asset sales, partnerships and joint ventures to US$3.2 billion in 2015, surpassing the company’s debt-reduction goal of US$3 billion.

“The sale of these assets is consistent with our strategy to create long-term value for our shareholders by strengthening the balance sheet and further focusing our portfolio on core mines that will drive free cash flow growth,” said president Kelvin Dushnisky in a press release.

Barrick's 2015 asset salesTo be able to live with such low metal prices, companies must continue to cover sustaining capital and pay dividends to shareholders. This means not only reducing debt, but also cutting costs and bolstering their balance sheets.

Of the other majors, Anglo American has also sold several assets. Glencore announced in October it would sell its Lomas Bayas and Cobar copper mines, and First Quantum pledged to reduce its debt by $1 billion in early 2016 “through a combination of asset sales and other strategic initiatives,” according to a press release. And earlier in the year, BHP Billiton spun off its ­­non- core assets into a new company called South32.

According to Patricia Mohr, vice-president of economics and commodity market specialist at Scotiabank, companies who reduce supply in a period of weak demand growth are placing themselves in a better position going forward, but it is going to take a few years before investors really see the benefits.

“Supplies, as we move through the decade, are going to become constrained because of a reduction in mine development,” Mohr said, adding, “tighter physical markets will eventually attract investors.”

– Katelyn Spidle

Door opens for equity crowdfunding

Businesses in five Canadian provinces will soon be able to crowdfund up to $1.5 million a year – all with a fraction of the hassle and expense currently required by prospectus-related disclosure requirements.

Crowdfunding, as defined by the Financial Times, is “a new and emerging way of funding new ideas or projects by borrowing funding from large numbers of people, often accessed through a website.” Artists have used this approach for years to fund their creative projects, but the concept is now being applied in places like the U.K. and Australia to help small- and medium-sized enterprises raise money in increasingly hard times.

On Nov. 5, the Ontario Securities Commission (OSC), alongside its counterparts in Manitoba, Quebec, New Brunswick and Nova Scotia, announced a prospectus exemption for crowdfunding, to coincide with a new framework to register the dedicated online portals needed to act as gatekeepers for the transactions. The exemption, which goes into effect in January, is open to reporting and non-reporting issuers that are incorporated or organized in Canada. They must have a Canadian head office and a majority of directors must reside in the country.

Although disclosure requirements will be streamlined for crowdfunding, investors still must receive annual financial statements and some additional written materials, in addition to signing a document acknowledging the risks associated with the investment. There will be an investment cap of $2,500 per investment, while accredited investors have a $25,000 cap per investment. In Ontario, no investment limits will be required for individuals with net financial assets exceeding $5 million.

Samad Uddin, the director for capital markets with PDAC, said the announcement is welcome news, with one caveat.

“This is an additional tool that companies can use when looking for alternative ways of financing their projects,” he said. “But it’s also very restrictive in the amount of money you can raise, and the amount investors can invest.”

Uddin, who worked for the OSC before coming to PDAC, said crowdfunding is a good fit for prospectors who need to raise between $50,000 and $100,000 to get out in the field, and generally speaking, companies that seek to raise less than $1.5 million (which is the maximum amount a company can raise annually). This could include the growing number of TSX-V “zombie companies” – ventures so poor they are not exploring at all, but are instead struggling to maintain their listing. (Listing fees alone on the TSX-V can cost as much as $40,000 a year, according to Uddin.) For larger companies, Uddin added that crowdfunding can be used concurrently with other more conventional fundraising efforts.

The new rules will also provide opportunities for the independent online platform providers to operate the registered venues required for crowdsourcing. Uddin said this new niche will likely be filled by so-called “exempt market dealers,” which are already licensed to distribute investment securities without a prospectus to institutional and high-net-worth investors.

Crowdfunding is just one of the ways to tap the global reach of the Internet. More than just finding investors, resource companies are already finding solutions to a wide range of problems through an approach known as crowdsourcing.

In September 2015, Integra Gold launched its online Gold Rush contest in an attempt to pinpoint new gold deposits on two recently acquired properties in Val-d’Or, Quebec. September also saw the launch of a $20-million global competition, cosponsored by NRG Energy and Canada’s Oil Sands Innovation Alliance (COSIA), inviting the public to propose “breakthrough technologies” to convert carbon dioxide emissions from power plants and industrial facilities into marketable new products like building materials and alternative fuels.

– Christopher Pollon

Strategy review

SidebarThe publicly traded Orbite Technologies has a mining lease, an aluminous clay deposit with an Indicated Mineral Resource of 1.04 billion tonnes in Quebec’s Gaspé region, and an offtake agreement with Glencore for all of the smelter grade alumina produced at the site, but you will not find it listed under the mining banner on the TSX.

Last spring, as the market capitalization of resource companies continued to sink, the company opted to drop the name Orbite Aluminae and its designation in the mining segment for the clean technology sector.

Asked in November whether the switch had had an impact on generating investor interest, Marc Lakmaaker, the company’s investor relations officer, said it was still too early to tell.

“The name change is more than just playing into the unpopularity of resource assets right now,” explained Lakmaaker. “It is really a reflection of what the company is about. Yes, we still have the Grande-Vallée property, and it is still one of the projects we are going to go after, but it is our third priority.”

At the top of the list is the commercialization of Orbite’s high-purity alumina (HPA) production plant. The proprietary process ticks a number of buzzworthy boxes: the product is in demand from the growing LED lighting sector and other hi-tech specialty products, it has a far better recovery rate than the conventional Bayer process and does not require tailings impoundment. The second priority will be to apply the process to various feedstocks from mine and coal power plant wastes and licence that technology internationally.

The start date of the three-tonne-per-day commercial HPA plant, however, has been pushed back more than once, but the company expects to begin producing before the end of 2015.

­– Ryan Bergen

Meet the new cabinet

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