In the midst of a gruelling bear market, companies that provide services to publicly traded resource ventures have been hit almost as hard as those operating in the space.
However, advising and consulting to junior miners also provides an intimate view into the company, a perspective many individuals are not granted. This, in turn, offers a comprehensive financial understanding of management’s decisions and possible effects in the marketplace.
The leading accounting firm servicing Venture-listed issuers is Davidson & Company LLP (D&Co.), where I work. I thought it would be timely to get Managing Partner Grant Block’s thoughts on today’s Venture market, as he has experienced multiple cycles over a 30-year career.
Mr. Block reminisced about the glory years from 2002 to 2011 with a smile. “Those were great years. Shareholders were happy and making money and there was lots of interest in the space. It was a good time for us, too. Since 2011 it has been a complete reversal, with the majority of the Venture issuers getting hammered down.”
He has noticed the market starting to consolidate and restructure. It takes a valuation effect for investors to realize that now there are bargains in the market. Many Venture-listed companies have market capitalizations below their cash value, suggesting their mineral properties have zero value — which is certainly not the case.
A key trend Mr. Block mentioned that will drive the industry forward is technology, which is advancing exponentially and will be a large variable for the mining industry. This will allow decision makers to position their companies more strategically, to the benefit of shareholders.
Increased information retrieval will speed up exploration decisions, resource development and project economics. Producers will also benefit from a lower cost of production, putting lower-grade resources into play. These are just a few of the ways technology will benefit the mining sector.
Mr. Block stated he is also optimistic on global dynamics. He sees our world becoming more of a global village, with each country’s improvements in living standards collectively benefiting the whole. There is plenty of room for improvement on this front: there are approximately 1,645 billionaires and 12 million millionaires in the world, but a staggering 2.8 billion people on the planet who make less than US$2 per day.
The growth in our global village will come from that 2.8 billion, whose $2/day will eventually increase to $5/day and $10/day, Block said. That will result in transitions from rural to urban society as people seek out basic lifestyle necessities, a trend already well underway in China. The infrastructure boom in these transitional countries will create demand for basic raw materials.
Shifting from what the future may hold back to present day, we are all aware this downturn has bankrupted companies. Unfortunately, there are still plenty of stragglers. Investors can expect more of these so-called “zombie companies” to delist from the TSX Venture exchange this December 31, 2015, as approximately 70% of Venture issuers have a calendar year-end.
It’s past time that Venture-listed junior miners took a hard look at all costs, including those incurred at the top, Mr. Block said. “No more first-class flights or weeknight parties for exploration management,” he said. “The work starts now.”
During this period, decision makers will have to make the final determination whether it makes financial sense to continue paying the bills. It will be a function of multiple factors, including inadequate cash, inability to finance, or management tired of extending loans with favourable terms to fund the Company’s annual audit.
One overlooked ingredient to the junior mining market becoming attractive again is positive media attention, Mr. Block stated. The media still has a great deal of influence on the general public, particularly generalist investors. The junior mining sector needs to get them on board to inform consumers that everything is okay and that the Venture market deserves a portion of their portfolio. Liquidity will be created and retail investors will re-enter the space.
Likewise, he thinks you will start to see large institutional funds and high-net worth-individuals allocating capital to resource investments. They are the long-term holders – the “smart money” – who recognize the attractive valuations in today’s junior resource market. One recent example is the New York-based Electrum Fund managed by billionaire Thomas Kaplan, which recently invested $10 million in a strategic financing for Yukon gold developer Kaminak Gold (KAM: TSXV).
Consolidation of properties and companies will also occur, Mr. Block noted, bringing costs down when multiple public companies consolidate as one public company (Oban Mining, OBM:TSX) is a recent example). This allows more capital to be allocated to exploration, which in turn will generate discoveries and help bring back the retail audience.
The hard work has begun for remaining junior resource ventures to help rebuild the reputation of the TSX Venture. Strong financial stewardship is more important than ever as consolidation occurs and Venture issuers try to wait out weak commodity prices.
Right now, Mr. Block feels we are at or near the bottom of the Venture market but he doesn’t want to speculate when it will turn. He is confident junior mining is coming back — and that Davidson & Company is here today and will be here tomorrow.