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‘Cash crunch’: Canada’s shrinking junior mining sector struggles for relevance — and deals

Last spring, Vancouver-based Hecla Mining Company’s chief executive Philip Baker Jr. announced a $600 million deal to purchase three gold mines in Nevada at a 59 per cent premium.

Baker assured investors his company conducted extensive due diligence to justify the hefty price tag.

“There isn’t anyone on the planet who knows this asset better than us,” he told the Financial Post.

About one year later, Hecla has initiated “a comprehensive review” after running into a flurry of problems in Nevada, including “unacceptable” costs, lower than expected production, problems expanding the mine life, excessive water in one mine and other issues. The mines produced 10,000 ounces of gold in the first quarter, down from the 162,000 annual production estimate given at the time of the purchase.

A Hecla spokesman said the review would take “a period of weeks or even a month or two,” and added that the excessive water was an issue that the company did not anticipate.

It is clear that the industry as a whole is not in good shape

Barrick chief executive Mark Bristow

Multiple analysts have downgraded Hecla, raising questions about how it will refinance $500 million in unsecured debt, due in 2021 if bond ratings agency were to review its credit.

Invoking Forrest Gump, John Bridges, an analyst at J.P. Morgan compared Hecla’s Nevada mines to a box of chocolates. “The wrapper seems to have been a poor indication of what was inside,” Bridges wrote.

Hecla isn’t the only precious metals mining company to face a downgrade by analysts in recent months, and a dark mood has settled over the industry in the face of middling commodity prices and a cloudy view of global economic growth amid trade tensions.

Poor performance by Canada’s mining companies in recent years has taken a toll on the entire industry, and many executives are reporting that traditional avenues of finance have dried up, with investors fleeing to other sectors, such as cannabis.

“It is clear that the industry as a whole is not in good shape,” Barrick chief executive Mark Bristow told analysts earlier this month, describing mining as irrelevant.

“We see the industry touring with survival style mergers and acquisitions, and again neglecting the requirement to continue to invest in the future,” Bristow added.

Agnico Eagle Mines Ltd. chief executive Sean Boyd voiced similar sentiment, saying at his annual meeting in April that the industry is “struggling” and “shrinking.”

The shrinkage of Canada’s mining industry was documented at a recent conference in New York by the Vancouver-based research and advisory firm Oreninc. It tracked around 1,400 Canadian-listed mining companies with market valuations of less than $1.5 billion and more than $100 million and found that they are raising less money and forging fewer deals.

According to data from the Canadian Securities Exchange, cited by Oreninc, cannabis companies raised $4 billion in 2018 compared to $217 million by mining companies.

On the TSX-Venture exchange, in 2019, a list of the top ten companies, ranked by the value of shares that were bought or sold included just one mining company and eight cannabis companies. In 2016, those figures were reversed with nine mining companies and one cannabis company on the list.

Meanwhile, a key area of financing, bought deals — in which a bank agrees to buy a set amount of stock from a company — has declined dramatically.

From 2017 to 2018, the number of bought deals for mining companies dropped by more than 50 per cent from 98 to 47. In 2019, the pace has still not returned with only 13 deals through the end of April.

The total number of all types of deals declined 32 per cent from 1,485 in 2016 to 1,005 in 2018. Through April 25, there have been only 284 deals this year.

“It’s a tough time for the industry,” said Amandip Singh, director of corporate development at GT Gold Corp. “There’s just not a lot of access to capital.”

His company, which is seeking to define a copper-gold deposit in British Columbia’s Golden Triangle, recently announced that Colorado-based Newmont Mining Corp. will invest $17.6 million to become a 9.9 per cent owner.

Such investments from a larger company offer many perks to a junior, including in GT Gold’s case payment of $1.53 per share when its stock is trading at 92 cents, as well as access to Newmont’s team of geologists.

Singh acknowledged the risk is that if the project does not meet Newmont’s exacting standards, it may seek to divest its position. Whenever a large company walks away from an investment in a company, the junior company usually gets pummeled by the market, he said.

“The market doesn’t sit back and think, ‘oh well maybe it didn’t fit in, the market is like … ‘oh, it must be shit,’” he said.

Kai Hoffmann, chief executive of Oreninc, said the lack of deals in the mining industry means companies that raised money in 2016 and 2017 are likely to run out of cash soon.

“We might see a cash crunch by the end of the year,” said Hoffmann. “Maybe some of these companies will disappear.”

• Email: gfriedman@postmedia.com | Twitter:

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