Mining 2.0 Consolidation Key to Access CapitalBy Alejandro Ehrenberg | Fri, 12/18/2020 - 12:12
Don't miss Dean McPherson's participation as a speaker at Mexico Mining Forum 2021 on February 10-11. You can find the program and registration here!
Q: What is the level of investor confidence in the mining sector and how does it tie into the precious metals bull market?
A: This year, commodity prices have been of particular interest, especially when gold reached record highs and topped US$2,000/oz. This trend has been developing over the past four years. In 2016, we started to see a turn in commodity prices. However, equity markets were not in sync and investors were not paying attention. Interestingly, we are finally seeing equity investors moving in sync with commodity prices this year.
Investor confidence in the mining industry is high. 2020 has been one of the busiest years for Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV). Investors are showing interest beyond the senior market and into the junior market. As of November 30, 2020, there were 932 mining companies listed on TSXV and combined with TSX’s 203 mining companies, there were 1,135 mining companies listed, almost twice as much as our closest global competitor. Our leadership as a global mining stock market is well-known. This year’s good performance for mining is best shown by the year-to-date performance of our S&P/TSX Venture Metals & Mining index, which is up by almost 60 percent. This is very encouraging and highlights the renewed interest investors have in mining.
At the end of October, Gatos Silver Inc. completed their IPO on TSX and NYSE. We are very happy to welcome another major mining company with operations in Mexico. Gatos Silver’s flagship asset is the Los Gatos District, including the Cerro Los Gatos Mine in Chihuahua, Mexico.
Q: How is the evolution of Mining 2.0 helping companies access capital?
A: A large part of the current confidence in the sector is related to its consolidation around Environmental, Social and Corporate Governance (ESG) issues, as well as improvements in operational efficiencies, through innovation for example. Also key is improved fiscal discipline showing up in improved balance sheets. We have noticed in this cycle the return of generalist investors. In April, we saw perhaps the world’s most famous value investor, Warren Buffett, take a positive interest in gold. It made headlines, showcasing that the sector may have entered a new phase. Mining companies are operating more responsibly, embracing modern new concepts and better communicating to the general public. There is still work to be done in improving our communication; particularly around the great efforts in embracing ESG for example.
TSXV has stepped in to help junior companies that are behind the curve. We recently launched an ESG 101 hub to help investors gain insight around the standards and provide mentorship and information for our junior issuers.
An important indicator is our flagship TSX30 program. Now in its second year, the annual ranking showcases the 30 top-performing companies across all sectors on TSX based on dividend adjusted share price appreciation for the past three years. In 2019, eight out of the 30 companies were mining companies. In 2020, 14 out of the 30 were mining companies. Seven of these companies started out on TSXV and then graduated to TSX, which was encouraging to see as well. This demonstrates the strength of the market and the renewed effort to do better, as well as the strength of our two-tiered system. It shows that mining 2.0 is also being adapted by junior companies. The key bottom line is generalist investors are taking notice and are more willing to invest in mining companies.
Q: What are the main financing trends for junior mining companies?
A: As of November 2020, TSXV companies had raised US$3.7 billion dollars, 122% percent more than last year. In addition, the average size of this financing for junior companies isCA$2.8 million, which represents a 40 percent increase over last year.
This complements other financing alternatives very well. It gives investors another avenue to access value in mining companies. Royalty companies for example are investment vehicles for investors to gain exposure to the mining sector. Private equity is another, which often invests in companies at a stage or time when public investors are not willing to participate. We see them as an important part of the financing ecosystem. These firms usually stay for five to six years and exit through the public market. All of these vehicles complement each other for both investors and companies within the greater system. Our focus is on providing investors and companies with the world’s most active equity capital and liquidity market. One with the path to listing flexibility and regulatory integrity that investors and companies can transact with confidence and trust.
Q: What is the investor perception of Mexico as a mining jurisdiction?
A: Mexico is considered an important jurisdiction. Outside of Canada, Mexico has perhaps the largest number of issuers and the highest number of properties represented on our exchanges. I think Mexico is considered to be a relatively safe jurisdiction. Even though it faces some security challenges at times, miners have learned how to deal with them and operate safely in the country.
In my opinion, while investors look for friendly regulations in any jurisdiction, consistency and transparency are also very important. In many jurisdictions, regulations change whenever a new government takes office. Most mining companies are compliant with strict regulations. There is no doubt investors recognize Mexico’s value. The challenge for the government is to create stability through consistency and transparency, and the reception of the Gatos Silver Inc. project in the marketplace stands as testimony that Mexico is doing things comparatively well.
Q: Why should ESG be top of mind for mining companies in search of investments?
A: Mining companies should be aggressive when it comes to increasing their level of ESG disclosure and communication with the investment community. They should not only share operating results but also show how they are raising stakeholder value beyond just shareholder value. The new generation is concerned about ESG. Miners need to demonstrate that they are taking all stakeholders into consideration. They should be focused on corporate governance and equality, diversity and inclusion (EDI).
There is a new set of investors that focuses on the added value and the way the environment and people are treated. Investors do not want to buy blood diamonds any longer, for instance. These are new concepts in the investor community and they are here to stay. Over the past 10 years, we have seen a growth in these concerns that goes beyond balance sheets. Investors are now more likely to invest in companies that are trying to meet ESG standards. This process will go a long way in attracting the interest of young and more generalist investors.
Q: How will mining perform in 2021?
A: When the global pandemic subsides, an economic rebuilding process will be paramount. The expectation is that mining will play a huge role in this. Governments will respond to the crisis through spending and infrastructure developments and as a result, the mining industry will be very active. China is further ahead in relation to getting out of the pandemic and we have already seen iron ore prices increase significantly in part because of China’s demand for infrastructure commodities. I expect the same to happen on this side of the world. As that trend continues, you will see commodity prices rise, including base metals. There is a fundamental supply/demand imbalance particularly in base metals. The expectation for the sector is very positive as economic activity picks up.
TMX Group operates global markets and builds digital communities and analytic solutions that facilitate the funding, growth and success of businesses, traders and investors. TMX’s key operations provide listing markets, trading markets, clearing facilities, depository services, technology solutions, data products and other services to the global financial community.