It's already been a tumultuous year for junior and
mid-cap Canadian miners. Get ready for things to turn even
A wave of proxy fights, mergers, business closures
and desperate attempts at financing is expected to inundate the
industry before calmer seas return. Survival amid this severe
economic downturn won't come easy.
A survey released in late February by the Fraser
Institute provides a hint of what's to come. Four out of five
mining executives predicted that at least 30 percent of global
junior explorers would go out of business before markets
recover; 40 percent said that more than half of the juniors
would disappear. Meanwhile, more than 90 percent of respondents
believed exploration and development activities at these
companies would be further curtailed.
"Survey responses indicate this year that the
mining sector expects dramatically decreased investment plans
along with a large number of companies either reducing activity
or going out of business all together," said Fred McMahon, the
Canadian research institute's director of trade and
Blame the collapse in commodity markets and the
hardship miners are experiencing in raising financing. It's
clear cash has become king because of its scarcity. Some 28 of
the top 100 mining companies on the Toronto Stock Exchange are
sitting on less than $25 million in cash, according to a recent
study by Ernst & Young. More than half of those 100
companies lost at least 50 percent of their market value
between July 2008 and January 2009.
The nonferrous metals sector has been particularly
hard hit, given the sharp declines in industrial production,
but even precious metals players are faced with a precarious
investment environment. Take Vancouver, British Columbia-based
Eldorado Gold Corp., for example, which in late February had to
ax plans for a Canadian $275-million ($224-million) stock
offering after the company could not meet its financing targets
as bullion prices retreated once hitting $1,000 an ounce. As
industry participants learned at the Prospectors and Developers
Association of Canada convention in March, some companies may
have to turn to non-traditional financing to ride out the storm
(AMM monthly, April 2009). These options include issuing debt
that incorporates equity-based options, earn-in deals with
majors, off-take agreements, royalty arrangements and export
credit agency loans. A few companies may be able to obtain
private equity financing, such as what NovaGold Resources Inc.,
Vancouver, secured with the private New York-based company
Electrum Strategic Resources LLC at the start of this year.
Many other companies will undoubtedly have to turn to mergers
and asset sales.
The severe blow to market caps may mean a lot more
turmoil at the boardroom level in the days ahead as well.
Shareholders, angered by the money they've lost, will want to
salvage what they can and take a more active role in
management, and that spells proxy battles. Canada provides
fertile ground for them, as domestic business laws allow
shareholders the capability to replace boards of directors in
between annual meetings.
Canadian lawyers are already bracing for a flood of
new business. Some cases may involve shareholders pressing for
a new business plan for a company; others could see hedge funds
demanding companies with sizable cash positions initiate a
share buyback or dividend payout.
The recent proxy battle between management of
HudBay Minerals Inc., Toronto, and SRM Global Master Fund LP, a
Monaco-based hedge fund that owns 11 percent of the mining
company, is a case in point. SRM had been pressing HudBay to
use some of its C$700 million ($572 million) in cash reserves
to initiate a share buyback, but company management rejected
the idea and instead focused on a proposal to take over Lundin
Mining Corp. SRM then launched the proxy fight to oust HudBay's
board of directors, which ultimately succeeded.
The HudBay case is particularly notable because it
may wind up influencing the rules of corporate governance in
Canada. The turmoil at HudBay started after the company
proposed acquiring Lundin Mining without shareholder approval.
Many voiced opposition to the deal because of its hefty
C$672.4-million ($549-million) price-tag and the dilutive
impact of a large share issue that was planned as part of the
The Ontario Securities Commission later forced
HudBay to call for a shareholders vote on the transaction-and
the deal quickly collapsed. With the lessons learned from
HudBay, boards of directors of Canadian mining companies may
have to give more thought towards calling for special
shareholder votes when planning acquisitions. Given the
consolidation that appears poised to rock the industry, this
could mean a lot of future shareholder ballots.
Amid these challenging times, however, there is a
silver lining. A leaner industry is materializing and the heavy
curtailment of exploration and development activity is setting
the stage for a shortage of global raw material supplies once
economies recover. Those lucky enough to find a life raft in
these rough seas will eventually be rescued by the forces of
supply and demand. The next cycle that awaits could be a
particularly rewarding one.