For some months, Canadian junior mining and exploration companies have found financing difficult to obtain and, with the situation now critical, many have cut budgets and programs pending better market conditions. But is waiting it out going to be enough? There are signs of structural change that suggest the traditional economic model for a junior mineral exploration company may not survive for long.
The well-established approach to financing a junior exploration company is to acquire a property of merit, raise equity funding on capital markets, use these funds to advance exploration as quickly as possible to deliver results to the investors and, if the news is positive, see share prices rise to reflect the promise of new wealth discovered in the ground. It is this appreciation in value that rewards the investor and allows the company to refinance for further exploration. The recipe is well-proven, has led to the discovery and development of numerous mines, and rewarded both explorers and investors financially many times over.
Three forces are currently working against the companies that rely on this model.
First, there is the ongoing international financial chaos, lower metal prices and lack of confidence on the part of investors to buy into higher risk investments, including exploration companies. These form an uncomfortable combination, but in many ways are familiar enemies for the people who lead junior companies. Such problems have reared their heads in one way or another in the past. Historically the business has always been cyclical so the conditioned (and stoic) response is, ‘wait and things will turn around’. And they usually do.
Secondly, there is increasing evidence that computer-based, high frequency, artificial intelligence algorithm trading has arrived in the junior mining company market. For some time, it has been noted that good press releases have little or negligible effect on share price, which hover around existing values or may even decline. A conventional response has been to explain this as investors going to cash in a soft market. However, an examination of some recent trading patterns suggests something sinister: strings of small lot trades which allow many small capital appreciations – the classic sign of algorithm trading. So, rather than share prices moving up as investors buy into a promising discovery or project advance, increasing overall capitalization to reflect the wealth implicit in the news of what is in the ground, liquidity is sucked out of the market.
The result is that investors do not necessarily get a ‘fair’ return, and companies do not see the appreciation that would allow comfortable refinancing for exploration, discovery and development to continue.
This is a new, unprecedented challenge for the junior mining companies. Lightning fast automated algorithm trading directly undermines the foundations of the economic model and can only be mitigated by regulating the way trading takes place. Junior companies should be asking hard questions of the Stock Exchange and the securities commissions, or risk being slowly driven out of business. Conversely, stock exchanges and securities commission should be asking themselves if they would be comfortable seeing the Canadian junior mining sector, currently globally dominant and at the front end of the metals supply chain, wither away.
Finally, but certainly not the least in importance, is that over the last ten years there has been a sustained shift in the balance of power in favor of local communities. Having a social license to operate is now more important than possession of the necessary legal permits and permissions. However, the process of gaining a social license, particularly with indigenous people, takes time and money and does not yield the sort of news release that excites conventional investors. On the other hand, pushing too hard, for example starting drill programs before the community is ready to accept them, and failing to reach a satisfactory relationship with local people leads to conflict, delays and even the loss of projects. This, again, fails to satisfy investor expectations, makes financing somewhere between difficult and impossible, and is a prime reason why Canadian juniors have gained a reputation as bad social actors.
For many explorers, the issues with communities seem to have become more frequent, widespread, complex and intractable over the last two years. That these social factors have the ability to run down funds before they can be replaced in the market through the delivery of technical results is a massive frustration. Leading, innovative companies have invested heavily to garner the expertise (internally or externally) to engage successfully with communities. Interestingly, in doing so they are gaining a competitive (survival) advantage by attracting the attention of an emerging class of sophisticated investors that recognize the social license as an asset with material value. However, they are small in number in comparison with conventional players in the junior market.
If this analysis is correct, any one of these factors – global economic crisis, artificial intelligence trading, and social dynamics – has serious implications for the conventional financing model. With the potential of all three working in concert, could we see the end of the traditional junior mining company?
Ian Thomson, is the Principal and Co-Founder of On Common Ground Consultants Inc., an international consultancy specializing in enhancing social performance and socially sustainable outcomes for the global resource sector.