History doesn’t repeat itself, but it does rhyme” – or so said Mark Twain (perhaps). Those in the mining markets are all too familiar with this concept. Mining’s cyclicality is very reliable, which is why many in the sector have been pushing hard to get their ideas going in time to catch this upturn.
But each turn also carries its own characteristics. That begs the question: What will matter in this bull market? We won’t know the complete answer until it’s over, but already a few features stand out.
First, majors are hunting for new projects, but the process and goals of the hunt have changed. After divesting all non-core assets and exiting joint ventures to mend broken bear market balance sheets, miners’ exploration and development portfolios are nearly empty. And they are looking to restock.
Corporate development teams from large and mid-tier miners are racing to lay claim to prospective exploration and development assets – but not in the form of high-premium takeovers. Instead, miners want equity stakes or joint-venture deals to get a foot in the door with good projects without committing a lot of capital.
Juniors can barely keep up with all the meeting requests from major miners. A lot of these discussions haven’t led to deals yet, but they will. When they do, even though equity stakes and joint ventures are not as exciting for the market as take-outs, the cash that will flow into exploration will generate new excitement and discoveries.
So the process has changed, becoming more cautious and stepwise. The goals have also shifted. Majors went crazy with acquisitions in the last bull market, often for big assets that were risky and expensive to build. The resulting write-downs and project cancellations still sting.
That means big is no longer the goal.
Goldcorp did not buy Kaminak Gold because the Coffee project will boost its production profile, but because Coffee is a low-risk, strong-returns asset that will strengthen Goldcorp’s bottom line. Later in the bull market the desire for big assets might return, but for now majors want low risk and high returns.
That brings up the idea of optionality. Several groups saw an opportunity in 2015 to buy deposits on the cheap and then ride the leverage to rising metal prices once the market turned. This idea – new this cycle in its reach, but really a copy of B.C. mining legend Ross Beaty’s strategy of buying copper assets in the last bear market – has worked well so far; optionality plays have seen very significant share-price gains.
The question is “What now?” Most optionality companies today plan to do no work on their assets, the idea being to spend little and let leverage do the work. But Beaty’s plan was different. His team advanced those projects markedly before each attracted a bid. Advancing assets today is perhaps even more important: majors want low-risk projects with the potential for high returns, so attracting a bid will require demonstrating that kind of potential.
In other words, the basic optionality play has likely already happened. From here, companies simply holding ounces or pounds in the ground will offer limited upside compared to juniors actively derisking and improving their properties because majors just aren’t interested in marginal assets this time around.
That’s the what, but also important is the where. At the start of 2016, the list of attractive jurisdictions did not go much beyond parts of Canada and the U.S. The scope has since widened significantly, encompassing such places as Colombia, eastern Europe and West Africa, but it will not get as broad as it did in the last market, when the blind drive for production growth had majors tempting fate in difficult jurisdictions – and later paying the price.
Also, location is not just country anymore. This risk qualifier now includes local social support, regional politics, topography, infrastructure, water availability and all kinds of location-based questions that need positive answers before a project works. In many countries, including Canada, the answers differ markedly from one province or state to the next.
Finally, this market should generate better results for shareholders. The bear market was bad not only because metal prices cycled down but also because in the last bull market most miners completely lost sight of what really matters – making money – in their drive for growth. Gambles on huge, risky assets led directly to massive write-downs and debt loads that almost sank our sector’s supposed stalwarts.
That is a very good way to scare investors away. They are starting to return, but to generate new confidence it’s essential companies remember that poor decisions last time are what made the bear market so bad. This time, the focus has to be on making money for shareholders.