Gold News

Gold Mining: The Abysmal State of the Juniors

Is there an existential threat to junior gold mining...?

KEVIN CAMPBELL, managing director at Haywood Securities, is concerned by all the negative talk about the state of junior mining. In this interview with The Gold Report, Campbell outlines the fundamental demand for commodities behind his conviction that this is a temporary, albeit viscous, downturn and that the TSX Venture Exchange, the industry and the experienced web of service providers that have built up around it are here to stay.

The Gold Report: As a managing director of investment banking at Haywood Securities, you're in a perfect position to report on the state of the junior mining financing environment. You called The Gold Report's March 25 interview of B&D Capital Consultant Don Mosher titled, "Strangulation by Regulation—Is the Venture Exchange on Its Deathbed?," alarmist. What is the state of the TSX Venture Exchange? Will it continue to serve the retail investor?

Kevin Campbell: The state of junior mining finance is abysmal. There's no question about that. The traditional sources of capital have all but evaporated over the last couple of years. Companies are seeking alternate sources of funding and in many cases are being successful. These sources include selling metals streams, selling royalties, hybrid debt, looking overseas, and all this is also leading to heightened merger and acquisition potential. The right companies will find ways to get by, but it's undoubtedly tough. Good management teams and good projects are going unfunded at the moment.

My concern is more around the public discussion of an existential threat to junior mining. I just don't believe that to be the case. It is an asset class like any other. It may be more volatile than others and subject to more extreme cycles. And we happen to be in a severe down cycle right now. Nonetheless, I believe that junior mining will remain an integral part of the commodity cycle going forward, and I believe in commodities going forward.

TGR: Are you saying that the challenges the junior miners are facing right now, particularly in finding funding, are simply cyclical? It has happened before; it will happen again and things will pick up.

Kevin Campbell: It all really comes down to flow of funds. The flow of funds from conventional sources has departed junior mining for the time being. But the demand for metals very much still exists. I think it comes down to some basic questions: Will there be more or less people in the world by 2025? Are they going to be more or less urbanized? Is their per-capita metal consumption going to be more or less than it is today? I think the answers point to the direction of enhanced metal consumption and more pressure from the demand side in the face of what has been a fairly anemic supply response thus far. I think there's reason to be optimistic and I think the cycle will see the flow of funds return. 

It just happens that we are in a trough where a lot of pain has been felt. I don't see any overall structural issue that would prevent junior mining from coming back to the fore at some point after this has all been cleansed and rationalized. One of my mentors in this business was let go from his mining role at a Canadian firm in 2001 with the explanation that mining was a "sunset industry." That sentiment is as nonsensical today as it was then.

TGR: Have some of the new suitability rules made it more difficult to raise the funding to meet that demand, particularly for the early stage work?

Kevin Campbell: We at Haywood don't have a problem with the relationship and conflict of interest disclosure rules that recently went into effect. Collectively we believe that regulation is a good thing until it becomes illogical, impractical or overly onerous, however, properly designed rules that bolster investor confidence is a net positive for Haywood and the industry. I haven't heard anyone take the position that these rules are going to materially restrict participation in these stories.

TGR: Can the new rules help with algorithmic trading and short selling or is that not a problem?

Kevin Campbell: That is a separate issue. Junior equity liquidity is not as robust as in blue chip names so unrestricted short selling and algorithmic trading can have a much more amplified impact on the movement of the share prices. That isn't necessarily healthy. I think the groups lobbying for rules in that area are probably on the right path.

TGR: You mentioned some of the additional reporting required under the new regulations. How will explorers, who by definition have no cash flow, pay for the increased legal and regulatory costs of doing business?

Kevin Campbell: This goes back to the rationalization that the industry is going through right now. We shouldn't confuse what is really a process of natural selection with victimization. Companies that are struggling to raise amounts of money just to pay auditors and legal fees will likely not, and perhaps should not, survive this period. The sector has been overpopulated by what had been a momentum market over the last 10 years and needs to be culled at this point. I actually think that's a healthier outcome heading into the next cycle. I'm perfectly happy to see fewer companies listed because when money does come back there will be fewer doors for it to go through.

TGR: If companies are moving to Asia or somewhere else or staying private and taking advantage of crowdfunding to find capital in this difficult funding environment, what would this mean for retail investors looking for opportunities to invest in public companies?

Kevin Campbell: I actually don't buy that underlying premise. I think money will be coming from Asia and elsewhere, but the Canadian mining marketplace is not in danger of being replaced by any of its competitors. Even in today's depressed capital market, 70% of the world's mining finance in 2012 came through Canada. We're only 2% to 3% of the world's GDP so it shows the level of confidence our system has been able to foster. 

The infrastructure—executives, salespeople, fund managers, analysts, regulators, auditors, lawyers, engineering groups, all the things that feed into the ecosystem that creates a dynamic junior mining environment—will not be easily uprooted and transplanted to Hong Kong or someplace else. It's a healthy environment and I believe that the capital will come to this market rather than the market going to the capital. That's how it's been before and I think that's how it will be in the future. There's just too much expertise built up in our system for it to be displaced because of a bad cycle.

TGR: In light of your thesis about this just being a down cycle, what is the fate for independent dealers and retail brokers?

Kevin Campbell: Those are two separate questions. Part of my motivation for doing this interview was because of what I read earlier in the week where your guest exercised some clairvoyance in talking about firms that could potentially be in trouble down the line and listed Haywood among them. I can't speak for the other firms that were mentioned, though I'm sure they would like to speak for themselves, but the premise of Haywood being in any difficulty is both ludicrous and woefully uninformed. It's a profitable firm with a great balance sheet and a very smart collection of people. 

Independent dealers are the gateway to junior mining generation and finance. I'm not saying there isn't a lot of pain out there. I think it's an incredibly difficult time for the independent firms that focus on natural resources, but I'm confident that the best will survive.

For the individual retail investment adviser, I think there's a nuance here that's being missed. Junior mining is a complicated business and an adviser needs a basic understanding of geology, differing jurisdictions, personalities, commodities and a whole litany of other factors. This requires a different skill set and experience than those advisers who instead select mutual funds for their clients. It is a comprehensive process and I think the general public should not invest in junior mining without an educated intermediary. 

The retail investment adviser fits into that role well. The ones that have been successful and survived multiple cycles will continue. New ones are still coming up. That said, investment advisers may have to look further afield for sources of capital and client bases. There are pockets of capital that are more robust than in Canada at this point and it's the job of the modern investment adviser in the junior mining space to find those pockets of capital. The ones who do will be well rewarded.

TGR: Are you saying that there will always be a role for both independent dealers and retail brokers in Canada to help people make smart decisions, regardless of the stage of the cycle?

Kevin Campbell: Absolutely. There is a well-educated junior mining investor audience in Canada and the United States that will always seek out the types of returns that a good cycle allows. There is a movement in the industry to focus on asset gathering and static index tracking-type investing, but some knowledgeable, risk tolerant investors will always look for differentiation and when they do, they are going to have to talk to investment advisers that are involved in sourcing earlier-stage deals and doing that in an intelligent way to earn superior returns over time. Individual security risk is compounded in times like this where things get very ugly. Investors need to have a high risk tolerance, but if they do, on occasion they can be very well rewarded.

TGR: For the investor, what is your prediction of the future of the junior mining industry?

Kevin Campbell: Prediction might be too strong a word, but I believe that the future is based on global demographics and migration patterns. There will be fits and starts for commodities along the way, but there are some stunning trends facing this world. By 2025, 8 billion people will be living on earth. Some 60 million people urbanize every year. India will add 500 million urbanized people by 2050, China 350 million, Nigeria 200 million. Just an incredible amount of infrastructure will be required, making the whole China story not as singularly relevant as it was over the past decade. 

I think we need to look hard to the secondary emerging markets and the rampant urbanization and consumer demands they're going to have. Further, there doesn't appear to be any let up in the accumulation of debt among sovereign states in the world or the willingness of central banks to create money by unconventional means. In my book, those types of conditions create a pretty good long-term picture for precious metals.

TGR: And the fate of the TSX Venture Exchange?

Kevin Campbell: It's all intertwined. This ecosystem of expertise is still going to be the place to go to for junior gold investing. There may be some enhanced regulatory burden. The cost may go up, but the right people with the right projects will come to Canada. The capital will come to Canada and they'll meet here. That is how the best mining companies have been created in the past and that is how they will be created in the future.

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