Over the last several weeks I have been reading and hearing first hand more and more about the amount of private equity money looking to invest into resource stocks. It is intriguing to say the least. Here in Canada we have the Toronto Stock Exchange (TSX) and its junior exchange for smaller companies called the TSX Venture Exchange. These exchanges for the better part of a decade have been heavily weighted to resources stocks: mining and energy explorers.
The old model of seed, IPO, grow and cash-up hasn’t been working the last few years. This model worked great when there was a healthy risk appetite, rising commodity prices and majors looking for acquisition targets. Imagine tech investing if there were no Apple, Google, Microsoft or Yahoo to buy up the startups. The VC’s would be forced to move up market and only invest in later stage private companies that could see an IPO exit. This very nightmare has happened in the tech startup equivalent of resource investing: the mining junior.
As commodity prices began topping out and weren’t rising at dramatic levels, any publicly traded stock associated with resources dropped. The leverage works both ways…up and down. The sector has been so out of favour the last few years and seen dramatic price drops of 75 to 90% for many stocks. The whole financial infrastructure has changed. Large brokerage firms who used to pump out a couple IPO’s each week have gone up market and into wealth management. Boutique firms have transitioned to the all mighty “cash flow” deal. Bay Street who used to legitimize a resource startup by bringing institutional money and liquidity to a story have all but closed their doors to all but the the bigger stocks in the sector.
As a result we’re seeing all the marginal players leave the space. IR people are leaving en masse and heading back to their bartender or car salesman jobs. Stockbrokers are starting to pitch their clients on biotech deals and roll-up plays. Less liquidity in the small companies means less interest which means the nature of what is financed has changed. Deal sizes are smaller unless for proven cash-flow projects r for proven management stroking large cheques themselves.
This leads me back to what is now going on. Private equity is taking advantage of these terribly depressed prices in stocks and assets that have very little interest. This is how fortunes are made in the investment world. Buy when they cry and sell when they yell. In other words, invest in out of favour quality assets at historically low valuations and wait to sell them at high valuations when there is immense competition to acquire in favour assets. As most things in life, there are cycles.
I think we’re a ways off from a general recovery in resource investing because private equity investors are largely looking for the large easy to monetize assets. Mining and energy assets in production or extremely close to production because they realize that they will have to find other ways to get paid to wait. Stats I recently read indicated that there may be as much as 5 times more money invested into mining from private equity funds this year than from public market sources. That my friends is huge!
Newstrike IR man Keir Reynolds
This means there is more money to buy mines…eventually we’ll need more money to find mines. I take this as a positive step that will eventually see investor interest return to the resource sector.
First published here.
