Last week the mining and exploration world descended on Toronto, for the huge annual Prospectors and Develops of Canada (PDAC) conference. It is the largest mining conference in the world. The day before PDAC, we hosted our first Toronto Metals Investor Forum. It was a great success, with a full and engaged audience and a host of strong companies. 

Opinion Divided
 
 

The most common question during and following PDAC is: How did you find the mood? Unless we’re smack in the middle of a strong bull market, it’s usually a difficult question to answer.

This year was no exception. Really, opinion was very divided.

Some companies are moving ahead full speed. They have promising projects and the funds to advance those projects. Many others, though, are really struggling. They have projects and vision but are struggling to find funds, and have been so for perhaps a year.

What differentiates these groups? Those in the former group have at least one of:

• Novelty. Newly formed companies can often raise money because of inexpensive valuations out the gate. This effect obviously wears off, but an initial raise offering the excitement of early value can give a group enough money to explore – and hopefully generate some success. Contact Gold (TSXV: C) and Allegiant Gold (TSXV: AUAU) are good examples.
• Real momentum. The general lack of funding for exploration means not very many projects have developed real momentum, but a few have. Good groups raise money when their share prices show life – and raise enough to get through the subsequent lag that is all too likely. Gold Standard Ventures (TSXV: GSV) is an example of a company that has created real momentum since the bear market ended and that momentum means the company was just able to raise $21 million.
• Recent success. The long bear market turned many investors away from metals, but there were successes both during the bear and since it ended. Investors who got those gains often remain loyal to the teams responsible. As such those teams have a solid base from which to pull new money, whether to continue working the same project or to advance a new entity. SilverCrest Metals (TSXV: SIL) and Auryn Resources (TSXV: AUG) are examples.
• Big backers. Big investors play an important role in the metals and mining space, from high net worth individuals to resource-focused funds to mid-tier and major miners. If any one of them become particularly interested in a company or project, the resulting capital can make a huge difference, both in the amounts they provide and the confidence their backing generates. Eric Sprott, Resource Capital Funds, and Osisko Mining are all examples.

Companies with any of these forces working in their favor are doing just fine. Not surprisingly, these teams generally think the metals markets are fine as well. Sure, things could be better, but freed from the stress of raising capital these teams can concentrate on advancing their projects and assessing the markets from a longer-term perspective.

Most in the industry agree that the forces are aligning for commodities, for reasons similar to those I’ve been arguing. For funded teams, the ability to look longer term means they can focus on that bright expectation while getting through the grind of today.

Things are different for those who need money right now. Without the advantage of novelty, momentum, recent success, or big backers, companies are having a hard time raising capital right now. After a strong move in the first half of 2016 the bull market stepped back and slowed down. 2017 was a downright boring year.

There were standout stories, of course, and those helped bring some interest to the sector. But I see a sector that is primarily still being funded by resource-focused groups, investors who have made money in mining cycles before and so are willing to position early. That matters because it means resource dollars at this point in the market are still pretty darn savvy – they know to identify and invest in momentum.

When the generalist money arrives, the level of sophistication declines just as a rising tide really starts lifting all boats. More capital plus and less sophistication means far more companies get funded.

But we haven’t gotten there yet. And so the stories without momentum are having a lot of trouble cobbling together the capital to generate any. Also not surprisingly, these teams have a darker view of the markets at the moment. I heard many comments like, “We just need gold to make its next move up” and “We have great targets that we’d love to test, but this market has made it really tough to raise money.”

Continue the conversation and in general these folks believe in a bullish big picture, but they can’t get excited about it when they’re weighed down in their current slog.

It’s hard to help. I do believe that generalist money will start rotating into the sector this year, as I’ve said many times of late, but these teams need to see it to believe it. I also can’t suggest that I think a good gold move is imminent, because I don’t. I think gold will track the metals complex up over the next two years, as the US dollar devalues through currency competition and inflation, as global growth spurs commodity demand, as commodities generally outperform because of the stage of the market, and as increase volatility prompts investors to seek diversification and value – but I don’t see gold outperforming the rest barring some kind of calamity.

So the best summary is that the mood was divided.

Within that, however, a few specific ideas jumped out. Some are company ideas that I will sort through in more detail, reporting back if any make the cut. Others are broader investment concepts, as I will outline in coming letters!