Exploration companies with experienced management teams and strong projects are often best at navigating an economic downturn.
Junior exploration companies with quality projects and strong management teams often have the knowledge and expertise to navigate economic downturn.
Financing is one of the most critical components for junior mining companies fighting to survive the downturn of a market and advance an exploration project. This can be an incredibly difficult task, especially when exploration funding is so intimately linked with commodities prices. In the face of economic uncertainty related to the COVID-19 pandemic, a company’s ability to survive the hard times has become more important than ever.
Entering into 2020, there has been reason to be optimistic regarding the gold price. At this year’s Vancouver Resource Investment Conference, Andrew O’Donnell, managing director at SuperCharged Stocks told the Investing News Network (INN) he sees a strong future for gold given the long-term fundamentals. “Now, we’re going to get more volatility in it, I think there’ll be trading in it. But I think this is more of a slower climb because the problems that we’re facing on a macro level are significant, and they’re not going away any time soon … There’s some significant foundational problems that mean gold is going to have a case for years to come.”
Firm prices in the gold market are beginning to impact the junior exploration sector, although slowly, according to Adrian Day of Adrian Day Asset Management. “It should not be a surprise that gold has moved and the junior space hasn’t. We are impatient. The junior sector has generally firmed, which is good. It stopped going down, and… companies with good news are now beginning to react and react very positively.”
According to Joe Mazumdar of Exploration Insights, the recent economic turbulence caused by COVID-19 has pushed investors to adjust their strategy. “The push for safe haven assets has pushed gold and also Treasuries,” he said during a recent Metals Investor Forum webinar. Based on feedback from leaders in the industry, the gold exploration companies most likely to ride out the storm are expected to be those with quality project fundamentals and strong management teams.
Qualities of strong junior resource companies
The ability of juniors to attract capital is also closely tied to the general risk appetite of investors which can ebb and wane with the commodity cycles. In today’s climate, it is apparent that investors currently prefer less volatility, more security and higher rewards.
“How do investors determine which companies have the best potential to attract capital in a challenging financial environment? Most analysts will tell you to look for those with quality projects in favorable jurisdictions and a strong management team at the helm,” said Brain Fowler, President and CEO of Northstar Gold (CSE:NSG). Fowler speaks from four decades of experience in the industry as a geologist, market analyst and mining executive who has raised more than C$20 million for junior exploration companies.
Resource companies with high-quality projects are much more likely to attract capital for exploration and development. The property is the strongest asset and the truest indicator of a company’s future profit potential. Naturally, the geology of the property has a lot to do with its value, especially the grade, size and metallurgy found on the property. While high grades are preferable, sometimes lower grades can produce higher margins depending on the deposit size and amenability to low-cost operations. “Although grade is often touted as king, it is actually the profit margin that counts and the ability to pay back the original capital investment,” stated Joe Mazumdar and Brent Cook of Exploration Insights. Those projects with district-wide potential are an added bonus.
Some types of minerals can carry more value than others depending on the commodity cycle and the supply/demand fundamentals. In times of economic uncertainty, gold can still carry a lot of value for investors. “Gold still represents about half of all the exploration done globally, and about half of all the financings done globally,” said Mullan.
Uncertain financial climates make for risk-averse investors. The more de-risked a project is the better. Taking the risk out of the project begins at the jurisdictional level. A near-surface, multi-million ounce and high-grade gold deposit may not be worth more than a gravel pit if its located in a country with a lot of political risk or a state with no-go environmental laws. Mining-friendly jurisdictions with transparent permitting and well-established infrastructure are key.
Establishing an industry-compliant resource base, completing positive economic studies and advancing through permitting can also have a dramatic impact on decreasing project risk in the eyes of investors because they provide hard numbers on a project’s likelihood of success. However, each of these critical catalysts requires capital — a harsh catch-22 for this industry.
Companies with strong, experienced leadership can inspire the confidence market participants require in order to finance a project. Management teams with strong track records including significant exploration and development experience are generally considered the safest bets. If the company’s end game is to be acquired by a major, the management team’s history with mergers and acquisitions is especially relevant. Similarly, if the company plans to bring the project through to production, the appropriate mining experts could be necessary to successfully take the project to the next stage. “Of the roughly 3,000 junior exploration companies combing Earth chasing down anomalies,” said Cook of Exploration Insights, “maybe half can be thrown out because of incompetent or unfocused management: management is key in the junior sector — get to know them.”
Strategies junior mining companies use to attract investors
Mining companies have a number of strategies at their disposal when working to navigate an economic downturn. In order to mitigate risk, companies will often build out portfolios of diverse metals projects, gaining exposure to new markets. Market changes can often prompt adjustments to techniques and strategies used at the production stage, potentially altering the efficiency of a deposit. A company that is actively seeking out low-cost solutions is likely to stand a greater chance of providing investors with a high return on investment, especially during an economic downturn. Across the junior resource landscape, one can find companies employing these strategies to advance their exploration projects.
Northstar Gold is building a diverse portfolio of properties in the Ontario region of the prolific Abitibi Greenstone Belt, one of the biggest gold- and base metal-producing regions in the world. The company’s portfolio currently consists of three wholly-owned, high-quality “stand-alone” projects at various stages of exploration and development; the Miller gold, Bryce gold and Milestone copper–nickel–cobalt projects. The Abitibi address provides shareholders with the benefits and reduced risk that come from operating in a mining-friendly and resource-rich jurisdiction, while the company’s exposure to both gold and energy metals helps to mitigate the risks associated with stocks tied to the ups and downs of the commodities cycles.
The Miller gold project hosts “Kirkland Lake-style” gold mineralization similar to that of Kirkland Lake Gold’s (TSX:KL,NYSE:KL,ASX:KLA) South Macassa Mine Complex. Northstar is working to validate and grow the historic resource estimate of 270,000 gold ounces near-surface with its own NI 43-101 compliant resource estimate. The company kicked off a two-phase exploration program in early 2020.
Silver Viper Minerals (TSXV:VIPR,OTCQB:VIPRF) used handheld XRF analyzer technology to make quick decisions and cut exploration costs during the early fieldwork at its La Virginia Gold-Silver Project in Sonora, Mexico. The company’s most recent success at La Virginia includes new discoveries made around the El Rubi zone. Silver Viper is currently working on the second phase of its drill program on La Virginia, which is 100-percent focused on discoveries made around the El Rubi zone.
Silver Viper’s management team members are also members of the Belcarra Group, a team of industry professionals who have technical and capital markets experience in developing projects. The company was recently able to raise C$4 million in a private placement with about 80 percent originating from new institutional investors. CEO Steve Cope told INN he believes this stat is indicative of a bull market in the gold industry.
Granada Gold Mine (TSXV:GGM,OTC Pink:GBBFF,FWB:B6D) used low-cost trenching methods instead of more expensive deep drilling for the initial phases of exploration at their previously-producing Granada gold property in Quebec. The trench results helped the company to better target its subsequent drill campaigns. The 2019 NI 43-101 resource calculation estimates a pit-constrained measured and indicated resource of 22.2 million tonnes grading 1.06 g/t containing 762,000 ounces of gold and an inferred resource of 6.9 million tonnes grading 2.04 g/t containing 455,000 ounces. The company will begin a bulk sampling program in early 2020 to further evaluate the high-grade, mineralized structures exposed at surface.
The many strategies used by juniors like Northstar, Grenada Gold and Silver Viper not only have the potential to grow value for shareholders, they also create exposure through company news and updates. During times of economic downturn, including the COVID-19 pandemic, these small strategic decisions have the potential to go a long way once the market corrects itself.
Project financing in the junior resource sector may be hard to come by but is not impossible to obtain for well-managed companies with high-quality projects and effective cost-saving strategies. For investors, moments of economic downturn can provide numerous opportunities to find the winner of the next market cycle.