Battered commodity prices and the financial crisis have taken their toll on Toronto’s far-reaching mining community, and most notably on the proliferation of juniors whose shares trade on the city’s exchanges.

Insiders are quick to affirm that Canada’s economic hub is still the best place for miners and explorers to raise capital and generate investor support.

However, depending on how long it takes for economic activity to recover, and for lenders to loosen their purse strings, the industry that emerges on the other side of the crisis may look very different to the one that entered 2009.

At the end of last year, there were 356 mining companies listed on the TSX, and a whopping 1 072 on the TSX Venture Exchange (TSX-V), for smaller companies.

In fact, the TMX group, which operates both bourses, is home to some 57% of the world’s public mining companies.

The world’s biggest gold-miner, Barrick Gold, has its corporate offices on Bay street – the nucleus of the city’s financial district – just down the road from the bustling intersection that hosts the office towers of four of Canada’s five major banks.

Toronto has also attracted the biggest community of mineral-resource analysts in the world, not to mention the bankers, lawyers and consultants that rely on the industry to survive.
It is fair to say that everyone in the mining sector has been affected by the absence of available credit, combined with falling demand and prices for commodities, which pulled the rug out from underneath most market valuations. (Gold prices, producers and equities being the notable exception.)

But the really vulnerable companies are the junior exploration plays, which struggle to get the attention of investors at the best of times, and are now, quite simply, running out of money.

Between June 30 and November 30 last year, the market capitalisation of mining companies listed on the TSX Venture Exchange dropped 73%, to C$7,9-billion, according to a report by Pricewaterhouse Coopers (PWC). The TSX-V as a whole declined 68% during the same period.

“The global financial crisis of 2008 shattered the junior mining industry in Canada and around the world,” PWC says in its ‘Junior Mine’ report, published last month.

“There could be no clearer indicator of this devastation than the market capitalisation of mining companies on the TSX-V.”

The losses were not limited to the junior exchange: in March, 14 of the 22 companies mentioned for review by the TSX main board, because they were not meeting listing requirements, were from the mining sector.

However, despite the obvious difficulties assailing the industry, it seems there is no need to panic quite yet.

There is still some time before a significant number of juniors seriously face extinction, says TSO & Associates MD and Canadian Minerals Resources Analysts Group chairperson Terence Ortslan.

Companies have moved quickly to slash spending, cancel exploration plans and reduce administrative expenses to the bare minimum, he says.

“Will we see juniors falling off the map? I think the first step is that they implement survival mode, and secondly they will try to survive, and we have already seen a lot of that happening in Canada,” Ortslan tells Mining Weekly.

“So I don’t think we will see a complete watershed in the next short while.”

However, if the current difficult market conditions are still in place by the first or second quarter of 2010, he expects that there may, indeed, be a wave of companies delisting and even closing altogether for lack of funds.

“But there are still a lot of options for these companies to consider, and most of them are surviving so far,” Ortslan adds.

PWC Canadian mining practice leader Paul Murphy agrees.

“If things do not improve it is likely that a significant number of Toronto-listed mineral companies could delist over the next 12 months, he says.

“Some very junior companies with no known reserves will find it difficult to raise money, and listing fees are also an issue – although less so than in the US or the UK,” Murphy comments.

Still Number One
For companies with exploration to fund, mines to build and debt to service, the million- dollar question is when banks will start lending money again.

In the meantime, firms are resorting to equity sales, with varying levels of success and frustration.

There is no doubt that Toronto is the best place at the moment for mining companies looking to sell shares, says Ortslan.

There is also a limited appetite for mining equity in the US and Australia, but financing in London remains extremely difficult, he says.

“I will always say that Canada and Toronto have a more established position and more advantages than other places for mining finance.”

Darryl Levitt, who handles corporate finance and other transactions as counsel with Canada-based law firm Macleod Dixon agrees that miners with listings on London’s Aim suffered the most from the economic crisis.

“Aim was generally institutionally held, and highly leveraged, so that when the hedge fund redemption hit, those companies took the biggest knock.”

He says that, although there is still some money for new mining offerings in South Africa, and “Australia is improving a bit”, Toronto-listed companies continue to hold the advantage.

“There is no doubt that Toronto is still the mining finance capital of the world,” Levitt tells Mining Weekly.

“And there is still a lot more money on the sidelines waiting for good projects.”

The problem is that, although there are funds available for mine building and project completion, man cannot build a mine on equity alone – or something to that effect.

“We need to see funds becoming available from traditional banking sources,” Ortslan says.

Until then, dilution remains a major issue for companies needing cash, adds PWC’s Murphy.

“Money is available but valuations are aggressive and historic shareholders are suffering significant dilution.”

He says that the investors’ focus has become more conservative, with political risk being factored in to a greater extent.

“Near-term production also makes financing much more possible and there is a stronger focus on the quality of management,” Murphy adds.

Shifting Landscape
There has also been a change in the type of investors that are showing up in equity offerings, Levitt says.

While before there was a lot of hedge fund participation, there has been a shift to individual investors, who are on the lookout for stocks that have been beaten down, and are prepared to climb in as soon as they see a sign of recovery.

“It seems there are some institutional investors dipping their toes in the water lately, but they are a lot more savvy and reluctant when it comes to where they look,” he says.

For the first time, China has also entered the picture in a big way.

The vast nation has been investing heavily in African resources and infrastructure for more than a decade, but it is only in the last couple of months that Chinese firms have played their hands in high-profile acquisitions to gain exposure to mines and resources in places like Australia and South America.

In a landmark transaction, the world’s third-biggest mining company, Rio Tinto, has arranged a $19,5-billion investment by Chinese State-owned metals firm Chinalco, while cash-strapped base-metals-miner Oz Minerals has also attracted Chinese bids.

“The Chinese have realised that, instead of just investing in African resources, which have been cheap but also carry political risk, because of the economic crisis, assets in the Americas and Australia are now underpriced too, which makes them especially attractive,” says Ortslan.

He expects that Chinese companies will become increasingly attentive suitors for Canadian listed firms.

Indeed, in late March, Toronto-based iron-ore hopeful Consolidated Thompson Iron Mines announced that Chinese steel producer Wuhan Iron & Steel had agreed to pay $240-million for a 19,9% stake in the company, plus at least 25% of a firm that will be created to operate the company’s new Bloom Lake mine, in Quebec.

“Australia is a natural for the Chinese because of the commodities they are seeking, but I think they will look all over the world, including North and South America,” says Murphy.

Canadian miners – the ones with cash, that is – are also becoming increasingly acquisitive among themselves.

“We are dealing with a lot of merger and acquisition activity at the moment, and a lot of it is hostile,” Levitt comments.

“Those companies with a bit of money are out there aggressively on the prowl for a good deal.”
With bullion prices outpacing other commodities across the board, gold-miners are certainly the most cashed up, and some have even begun to look for a bargain in unexpected places.

In March, Kinross Gold, led by CEO Tye Burt, announced it would spend $150-million to buy 19,9% of Harry Winston, plus an effective 15% interest of the Diavik diamond mine, in Canada’s Northwest Territories, in which Harry Winston holds 40%.

The transaction gave Kinross a relatively cheap inroad into the diamond market, and enabled Harry Winston to pay off all the debt owed by its mining unit.

There has also been a steady stream of tie-ups announced between juniors, often in an attempt to match one company’s more advanced project with another’s superior balance sheet.

However, good intentions are not enough, and a number of the deals have fallen apart within weeks of the initial agreement.

In these cases, the sticking point usually ends up being the valuation of a company’s shares, because market capitalisations have shrunk so dramatically in the last year, says Levitt.

“Companies are still living in the past valuations, and so they find it difficult to accept an offer that is based on today’s realities.”

Strong Base
The good news is that much of Toronto’s financial and business community relies on, or has links to, the mining sector, and this will likely prove an asset in speeding the industry’s recovery, suggests Levitt

The sentiment is echoed by Murphy: “Certainly, I think Canada is a broader market than anywhere else, and the industry is well followed and watched out of Canada.”

Canadian firms generally have well-known management, and the respected reserve definition standards, introduced by National Instrument 43 101, will also help restore and hold investor confidence, he says.

As may be expected, however, mining- related professionals in Toronto have not entirely escaped the pruning that has swept through the world’s financial sectors.

“Yes, we have seen a small decrease in the mining community,” Ortslan says.
“I think there has been a trimming and I would also expect there is more to come.”