At Sprott, we like to think we have our fingers on the pulse of the metals and mining market. Like other participants in our markets, we do keep our eyes on merger and acquisition activity, exploration work, new discoveries, debt issuances and of course the public markets. But we also have a distinct competitive advantage in understanding market sentiment: our clients. Your phone calls and emails with market and exploration questions, concerns and investing successes give us an exceptional view of the landscape and often guides our own research activities, and we thank you!
Recently, two questions have been surfacing. “How long will this trend last?” and, tellingly, “What newcompanies should I explore?”
The answers for both are intertwined. For every new company entering the public markets, 15 are leaving. The last few years have helped to wash away the junior exploration companies, many of which shouldn’t have been publicly traded in the first place. Ernst and Young mapped the delistings and new admissions since 2008.
Source: Ernst & Young
Fitzgerald, Liam. “Mining – Junior Mine 2015.” Mining – Junior Mine 2015. PwC, n.d. Web. 18 Aug. 2016.
Intuitively, companies will come to market when capital is available. During the last bull cycle, particularly in 2010 and 2011, more than 40 new companies were admitted to the TSX or TSX-V per quarter. Interestingly, delisting stayed relatively high during this period as well, attributable in some degree to takeovers. Starting in the third quarter of 2013, the ratio reversed, and for the last three years far more companies have delisted than have been admitted. In the first quarter of 2016, only two companies were admitted (Nickel One Resources and Candelaria)—while approximately 30 delisted. As long as capital remains scarce and cautious, this trend does not appear set to reverse any time soon.
There is correlation between the available capital in the space and delistings. PriceWaterhouseCoopers (PwC) observed the top 100 mining companies on the TSX-V since 2009, (note, this excludes the TSX-listed companies, which are featured in the charts above). According to PwC, “The top 100 junior miners on the TSX-V raised CAD$515 million in equity financing in 2015, 25% less than last year, and almost all of it (86%) was raised by just 15 companies.”
The result has been a collapse in cash held by the top 100 junior mining companies. From the peak in 2011 with $2.3 billion in aggregate cash, these companies collective balance sheet contain a total of just $700 million in cash at the end of 2015. Additionally, values have fallen five-fold; the combined market capitalization of the top 100 companies now adds up to a mere $4.8 billion, down from $20.6 billion in 2011.
For reference, two Sprott Physical Gold Trusts (PHYS), with a current market capitalization of $2.4 billion, would be worth more than the top 100 miners on the TSX-V combined.
Source: PwC
Patel, Jay. “Canadian Mining Eye – Q1 2016 – Joiners and Leavers.” EY. Ernst & Young, 2016. Web. 18 Aug. 2016.
So, to answer our original two questions: Despite the record-breaking pace we saw in the first half of 2016, in terms of financings, we remain very near the bottom in the juniors market. This same cohort is still clamoring for capital, placing equity and debt providers in an enviable position. Capital providers like Sprott are currently able to exercise considerable power and extract strong terms. With regard to new companies, even after the gangbuster year for the TSX, more companies go extinct each quarter, which is a painful but healthy rebalancing. Sprott remains committed to bringing you only the best of them.
And keep those questions coming!
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