The price of gold rose sharply in 2019 – about 20% over the last 12 months – leading to many immediate beneﬁts for the Canadian mining sector. The upswing boosted the stagnant mining equity markets and triggered an increase in equity ﬁnancings, which returned in 2019 to help mining companies at all stages of development to fund next steps.
The surge in gold prices also stimulated renewed interest in new project development and M&A activity. This resulted in a number of high-proﬁle consolidations among gold producers with many smaller transactions in the pipeline. Overall, there is a new sense of cautious optimism in the precious metal markets. But where do we go from here?
It seems unlikely that the current gold price environment will lead to any fundamental shifts in mining investment activity in Canada. There remains a signiﬁcant funding gap in the mining sector and no apparent way to ﬁll it completely. That said, it’s probable that the higher gold prices will provide opportunities to select junior mining companies to fund continued development towards construction and/or a takeover by a producer.
The numerous streaming and royalty companies that evolved to ﬁll the funding gap left by the exodus of mining equity investors will also probably beneﬁt. A stream is essentially a forward contract whereby a mining company agrees to sell a certain amount of its future metal production to a streamer in exchange for a combination of upfront payments and discounted payments at the time of delivery of the metal.
Owners of streams and royalties on producing gold projects have booked signiﬁcant proﬁts in 2019 as a result of higher gold prices. The need to deploy these proﬁts into new investments should lead to increased activity in precious metals streaming in the next couple of years.
The most likely scenario is for the streamers to continue to invest in promising precious metals projects in safe mining jurisdictions like Canada, but to also look increasingly further aﬁeld to riskier jurisdictions in search of investment opportunities. This will no doubt result in a mix of safer investments in more conventional mining countries and higher risk-reward transactions where there may be geopolitical concerns. A greater focus on stream restructuring and insolvency solutions will inevitably flow from the increased investment in such higher-risk projects.
As for private equity, it is unclear what role it will play in mining in the near-term. Private equity investors have brought signiﬁcant capital to the mining sector in recent years as consideration for a mix of equity, streams, royalties, offtake and debt. We expect higher gold prices to cause them to continue to invest strategically in the mining industry and to play leading roles in funding certain mining projects through construction to production.
However, any hope of a resurrection of the frothy mining IPO markets may be misguided. Gold prices would need to increase another 25% from today’s levels to make many private projects economically interesting enough to warrant a going public transaction. Investors seem unwilling to make large bets on new unproven companies and would instead rather make safer investments in established mining names, or else look to new sectors such as cannabis for riskier, but higher potential returns.
As 2019 draws to a close and 2020 approaches, the focus for us will be on whether higher gold prices can be sustained long enough to allow the continued development and ultimate sale of some of the more advanced junior gold companies listed in Canada. In the longer term, we believe that streaming and private equity investors will continue to be the main drivers of mine development and construction as they reinvest proﬁts and new capital into the industry. We look forward to exciting new transactions in the months ahead.
ROBERT MASON is a Toronto-based partner and the head of mining in Canada at Norton Rose Fulbright. For more information, please visit www.nortonrosefulbright.com.