Junior markets show ‘signs of life,’ PwC reports

VANCOUVER — According to PwC’s annual junior mining report — entitled Signs of life — it’s generally been a better year for companies listed on The S&P/TSX Venture Composite Index. Market values and cash reserves have broadly increased, while equity and debt capital appears to be more readily available. Drill deeper into the numbers, however, and it’s apparent that the rally has largely been reserved for the gold business.

The top-100 companies on the Venture exchange account for roughly two-thirds of the mining sector’s market value. PwC found that the market capitalization of these companies surged 138% year-on-year through the end of June to $11.4 billion. The aggregate market cap of the top 100 juniors was just $4.8 billion a year earlier. Exploration-stage companies were the largest beneficiary, likely because they tend to demonstrate the most equity volatility in relation to market sentiment.

There are approximately 1,000 mining issuers on the TSX-V, with the top 100 accounting for approximately two thirds of the sector’s market value. Credit: PwC.

The report found that the 63 exploration companies on the list jumped 154% year-on-year, while 25 issuers focused on development-stage assets enjoyed an aggregate gain of 124%, and the 12 “production companies” demonstrated a “respectable” 67% growth rate. In terms of commodities, gold companies had an average market capitalization of $112.3 million, up from around $51 million a year earlier.

PwC National Mining Leader, Liam M. Fitzgerald. Credit: PwC.

“There’s clearly been a rally in the sector and a lot more people are investing. The value increase also means shares are becoming better currency to do deals, or in other words, companies have more ability to do transactions with stock,” commented PwC Canadian Mining Leader Liam Fitzgerald during an interview.

“The other element is that both equity and debt financing activity has notably increased. The concern would be that gold is really dominating these numbers, though I’d point out lithium has had a good year, as well. When we looked at base metals like copper, zinc, and nickel, the rallies have been fairly muted,” he added.

PwC found that the ability to “go to the market for funds” remained steady over the past twelve months, but the participation of junior-level companies increased significantly. Cash flows from financing activities rose 89%, to $1.2 billion, with the top-100 raising $763 million through equity financings and the remainder from debt.

The report does note that four companies essentially “dominated” junior financing activities on the equity front, namely: Integra Gold (TSXV: ICG; US-OTC: ICGQF) with $61 million; Gold Reserve (TSX: GRZ; US-OTC: GDRZF) with $57 million; Kennady Diamonds (TSXV: KDI; US-OTC: KDIAF) with $52 million; and Roxgold (TSXV: ROG) with $46 million.

“When you look at equity sources a lot of it is from the general market. When you look at the financings, they are not in big blocks and it’s mostly through prospectus offerings or brokered placements. At the lower end of the list you do see more in terms of private placements, mostly coming from management teams and key investors. So that bottom end of the junior spectrum is still struggling,” Fitzgerald elaborated.

Cash flows from financing activities rose 89%, to $1.2 billion, over the twelve months to June 30, 2016. Credit: PwC.

One promising aspect is a rise in cash reserves. The top-100 companies reported a total of roughly $900 million in their coffers, up from $670 million a year earlier and close to levels reported for 2014.

There are a few promising stories among commodities outside the gold space. Lithium, a key material in batteries for electric vehicles and consumer electronics products, has been a bright spot. Five companies in the top 100 are primarily lithium plays, compared with just one in 2015. Meanwhile, uranium explorer NexGen Energy (TSX: NXE; US-OTC: NXGEF) sat atop the 100 list before graduating to the TSX in July, and saw its value more than triple in the 12 months. It also secured over $70 million in debt financing during the period.

Base metal markets, however, remain mired in recession.

“It’s a bit hard to get a read on base metals because they are so driven by supply-demand curves, and a lot of it comes out of China and macro-economics,” Fitzgerald concluded. “That’s compared to precious metals, which is a lot more about market sentiment. It’s difficult to judge when the supply-demand dynamic will allow many of these commodity producers to have a sustainable recovery. When it comes to base metals like copper, nickel and zinc, the supply is still there and it’s providing that pressure that mutes recovery.”