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Published: March 10, 2020
Updated: March 10, 2020
BDO's Natural Resources team recently attended the Prospectors and Developers Association of Canada's 2020 Annual Convention in Toronto, Canada. Bringing 25,000 people from 135 countries to Toronto, the convention is easily the world’s premiere international event for the mineral exploration and mining industry.
While at PDAC, our team listened to dozens of speakers and caught up with many of our clients and colleagues to glean insights into current events and predictions for the global mining sector. PDAC was one of the few major events not cancelled or rescheduled due to the COVID-19 outbreak, though registration numbers were down when compared to previous years. We noted several common themes, the most significant of which we've summarized in this paper.
China is down, but far from out
Almost without exception, when speakers referenced 2020 projections, reduced demand from China was a major factor, with the uncertainty of COVID-19 being at the core of the issue. Given that this virus could just be getting started, it's impossible to factor in it's full effect it will have on China's and the world's,
economy, with many suggesting that if the virus is under control by mid-year and if China provides a major stimulus package to kick start its economy, then we may end the year off flat. But the underlying message is clear: China is central to the global economy, and the weakening of China significantly affects everyone. This perhaps is not news, but the irony of this is that the emphasis of China's importance to the world may give them more political and economic clout after COVID-19 than before, given the role the country plays in the world economy.
Cleaning up the junior explorer market
Juniors have struggled to attract financing for several years and 21019 was no different. Data over the past few years indicates that exploration performed by majors increasingly exceeds that of the juniors. Much of that spend by the
majors is on 'near to mine' expansion opportunities. Earlier stage exploration is still being carried out by the juniors but much of the funding juniors were able to secure came from the majors. This increase in exploration oversight by the majors should result in a more effective process, given there will be more scrutiny and focus on results. This process will also serve to starve out the numerous 'lifestyel companies' that have historically been so prevalent in the junior space. Investors should be wary of companies that previously marketed themselves as exploration companies who suddenly shift their interest to the newest ‘hot’ markets such as cryptocurrency or cannabis.
ESG on hold?
At PDAC 2019, the importance of Environmental, Social, and Governance (ESG) programs was on the lips of nearly every mining executive at the podium. While this certainly remains an important issue, its reduced prominence at PDAC 2020 suggests that many are focusing on simply maintaining profitability in light of the numerous economic setbacks that have occurred due to issues such as the China- US trade war, Brexit, and of course the current COVID-19 outbreak. while ESG was the main topic of discussion recently as at the Mining Indaba in early February,
it is concerning that it could be moved down the priority list so quickly by the prospect of economic uncertainty. The irony is that the reduced economic activity caused by COVID-19 is reported to have caused a significant reduction in China's carbon emissions, with estimates as high as a 25% carbon emission reduction.
Royalties are all the rage
Not only has financing for juniors reduced in volume, the nature of the financing appears to be shifting toward royalty arrangements. Royalty companies appeared in force at PDAC. Not only do they fill the gap between debt and equity for juniors, they often provide their investors in royalty companies with a better, and often more certain, return than an equity or debt instrument may provide. Further, when aggregated into a royalty company, such arrangements provide the benefits of a diversified revenue stream while reducing exposure to operational risks typically associated with mining investments. Look for a notable shift from debt and equity financings to royalties through 2020. It is not a cheap form of capital, for juniors but can be an important option to fill a funding gap.
The Australians are coming!
2019 was a very good year for mining and financing in Australia, and Western Australia has been named by the Fraser Institute as the top jurisdiction for mining in 2019.
We've noted a significant boost in interest in ASX listings, and many Australian companies flush with cash are looking to deploy capital into their own and other's projects. With the reduction in demand for many commodities and the high potential for a global recession in 2020, we may see an increase in ownership of overseas mining assets by Australian companies as they encounter bargains abroad. Conversely, Canada did not factor into the Fraser Institute's top 10 mining jurisdictions for 2019, down from holding four of the top 10 spots in 2018, confirming Canada's reduction as a preferred mining jurisdiction over the past few years.
Contacts:
Bryndon Kydd, Partner, BDO National Cannabis Leader, Capital Markets
Sherif Andrawes, Partner, Global Head of Natural Resources