Savvy resource companies are taking advantage of market cycles to position themselves for growth when market sentiment and project economics are more favorable.
The global mining industry could be nearing the end of a decade-long stock market cycle.
In the stock market, the past few years have been dominated by downturns that have stifled economic growth, bringing on the premature closures of mines and uncertainty for mining companies and investors. The future, however, is looking brighter as merger and acquisition (M&A) activity has increased recently, signaling a renewed interest in the mining sector. This has been further supported by the recent performance in the gold price, which has brought life back to the stock market. This price activity has created a sudden influx of early exploration-phase projects, and each one brings an opportunity for investors to take advantage of that blue sky potential.
The past decade has been characterized by many as an uncertain bear market, specifically in the resource sector. The global financial crisis that began in 2008 brought with it a downturn in mining investment. These difficult years saw the closure of mines around the world as shrinking margins rendered these producers inviable. Even as the global economy has recovered and the resource sector has seen periodic “false starts,” the market sentiment remains uncertain.
Over the past year or so, however, things have finally begun to look up. According to PwC’s Mine 2018 report, commodity prices and equity financing have both been on the rise since 2016, indicating that the sector could be in recovery mode. The report shows total mining sector revenue rose from C$489 billion in 2016 to C$600 billion in 2017, with a projection of C$642 billion for 2018. The report also points out a 31 percent increase in exploration spending by Canadian mining companies looking to prepare for long term growth.
The main driving force behind the renewed optimism has been skyrocketing metals values, which have also been increasing since 2016. Much of this can be attributed to the rise of renewable energy technologies. According to the International Energy Agency, the number of electric vehicles on the world’s roads is expected to more than triple from approximately 3.7 million in 2017 to 13 million by the end of 2020. With that growth comes a potentially massive surge in demand for lithium, copper, cobalt, graphite and other battery metals that are needed to power these vehicles.
The precious metals sector has also seen significant price action in 2019, as speculation surrounding tensions between the United States and Iran caused the price of gold to shoot past a six-year high of US$1,400 per ounce. According to industry analysts at FocusEconomics, gold’s role as a safe haven has been a driving factor in the recent price activity, as political tensions and trade war activity continue to create economic uncertainty.
Timing a market cycle
Forward-thinking mining companies capable of planning ahead are best positioned to roll with the volatility of the resource sector. While the industry is in an economic downturn, as it has been for much of the past decade, mining properties can be bought up cheaply. By holding onto those properties during a bear market, companies have the potential to unlock value once the market picks back up. Companies that wait to see the recovery before investing in properties may find themselves paying far more and generating far less value in the long run.
The influx of M&A activity in the mining sector indicates that a number of companies are optimistic about future market cycles. For investors, these highly prospective early-stage projects carry a higher level of risk, as companies at this stage are still discovering what they have in a land package. However, resource projects at the exploration stage also have significant potential for reward while offering the opportunity to get in at a lower price point than later-stage development projects.
“The mining downturn has presented opportunities for investors to get in for the next uptick. Some opportunities can involve varying levels of investment at production stage or advance development but if you want to choose the real risk/reward the exploration stage is where you want to be,” James Macintosh, president, CEO and director of Monterey Minerals (CSE:MREY,FWB:2DK), told INN.
Current market cycle opportunities
Recently, Monterey Minerals has taken steps to ensure that the company is well-positioned for a potential bull market in the resource sector. In February 2019, the company acquired two mining tenements, collectively known as the Sherlock River property, which covers 135 square kilometers of land in the Pilbara region of Western Australia. Monterey is currently developing an exploration plan for the Sherlock River property, which remains largely underexplored at this time. Historical exploration work indicated the presence of gold anomalies adjacent to the southern border of the property. Further acquisitions completed in April and May of 2019 have helped Monterey expand its assets in the Pilbara region with properties ripe for exploration.
“We’ve suffered from a 7 to 10 year down cycle depending on who you talk to. Given our experience over the last 25 to 30 years, we’ve positioned Monterey to benefit from the upside as the sentiment comes back on side,” said Macintosh. “That’s why we’ve taken such a large land position in an area that’s so prospective. When the market does turn you won’t find properties at the price we paid.”
Recent months have seen the commencement of several new projects as enthusiasm returns to the mining sector. American Battery Metals (CSE:ABC,OTCQB:FDVXF,FWB:A2PD0G) has begun the exploration of its Emery County, Utah, Temple Mountain project in 2019 and recently staked 52 new claims to the northeast of the property. The company has begun geophysics, trenching, mapping and sampling on the Temple Mountain property, where historical assays have indicated as high as 4.97 percent vanadium oxide. Similarly, Lake Resources (ASX:LKE) has recently begun two lithium brine projects in Argentina amidst a year-long lithium price drop.
As the resource industry continues to heat up after some rough years, companies targeting precious metals and battery metals have begun to position themselves for value through strategic investment in highly prospective early stage projects. As the market continues to cycle, resource companies and investors have a unique opportunity to identify projects in an optimal position to capitalize on the next resource boom.
This article was originally published by the Investing News Network in July 2019.