The TSXV, home to Canadian juniors, is down substantially decade over decade, yet another reason the top minds in mine finance suggest retail is dead. (Image: TSXV)


Emergent sources of finance are shrewder, ruthless, and aligned with the energy transition and critical minerals narratives

By Jesse Morton, Technical Writer

Where will the Money Come From?, a session of the Capital Markets Program at the Prospectors and Developers Association of Canada (PDAC) convention, stayed on script until the floor was opened to questions. At that point, it was asked “is retail over?”

The preamble to the question argued that juniors are dependent on retail, and that, in Canada, “two thirds of the financings last year were from 12,000 people.” The largest grouping within that 12,000 is the 80-plus-year-old demographic. Logically, the question is “where does retail fit moving forward or is that chapter coming to an end?”

At PDAC, world-renowned philanthropist Pierre Lassonde, center, said retail is dead because the middle classes were taxed out of existence and won’t be back. (Photo: PDAC)

The question proved to be a fitting finale to the session, which had some heavy hitters from the world of mining finance advising mining houses to plan to diversify their sources of finance. It sparked a couple minutes of frank talk on lesser-discussed realities of the current economy. It was a discussion that in a way would bring cohesion to the overall message of the event.

Philanthropist Pierre Lassonde started by saying retail is dead because the middle class is dead. In the 1980s, “the disposable income that
the middle class had, it was far better than it is today with the 54% maximum tax rate here in Ontario,” he said. Quebec is a similar economic dystopia where “the middle class has no disposable income.”

In the 1980s, Lassonde said, “you had literally tens of thousands of people with disposable income.” The attitude was “I’ll take a thousand or two and I’ll bet on the junior instead of going to Vegas. It is more fun and if there’s a discovery, then I’m a part of it.”

Those days are gone, perhaps never to return. “That group of people, they’ve been completely washed out by our government over the years and they’re not there anymore,” Lassonde said. “And with a 54% tax rate, they’re not coming back.” Those with disposable income, the millionaires, use that income to “mitigate some of the burden of taxes,” he said. “That’s why you have very, very few people left” that will buy retail.

Lundin Mining Chair Adam Lundin countered, saying that retail is not dead, just sleeping. He gave the example of one junior that relatively recently used a publicity campaign targeting the public that bore fruit. “I think retail is going to play an important role, but I think it is not the source to rely on when you’re raising capital,” he said. “But especially when you are getting up and going, retail can really help with liquidity.”

Lundin Mining Chair Adam Lundin said retail still has a faint pulse, and success stories can still be found. (Photo: PDAC)

Earlier in the session, Lundin said, “I think now’s a great time to be investing in mining stocks.” He couched that statement by saying, “we’re just in a bit of a low period.”

Jacqueline Murray, a partner and head of fund at Resource Capital Funds, said retail is not dead, yet, “but don’t rely on it, and educate yourself.”

The non-question that followed attempted to settle the non-debate. Retail has indeed flatlined, said Ron Bernbaum, and the life support system is the charity flow-through investors. The PearTree Financial CEO, who has eulogized retail in previous settings, said the charity flow-through space is dominated by “individuals who make over $800,000 a year.” These investors “have no interest in investing in the space, and donate their shares.”

They “buy the shares for tax value, donate the shares that immediately are sold to global third parties, at a discount to market, stripped of tax value,” he said. “If I continue talking, everybody will need antidepressants.”

He continued in an interview after the event, and said, “retail is dead due to horrible returns. The TSXV, the home of the juniors, is down over 40% in the past 10 years.” Charity flow-through, managed by a handful of major players, infuses $100 million per year in the TSXV and elsewhere, he said.

“Over 90% of all the flow-through shares bought in Canada are under the donation format with Australians funding most all critical mineral exploration, including lithium exploration over the past two years,” Bernbaum said. “As for the future of retail, the PDAC gathering suffers from sector delusional optimism.”

Capstone Copper CEO John MacKenzie said when Capstone merged with Mantos and reverse-listed on the TSX, it created one company with four assets, thereby reducing risk, to which investors are adverse. (Photo: Capstone Copper)

The Post-retail Capital Stack

Rosy delusions discounted, the PDAC session ultimately offered a cloudy economic outlook for juniors. If there is a silver lining, Murray said, it may be that while retail seems moribund, “there are other sources of capital across the full capital stack.”

The full capital stack is comprised in part of hedge funds, pension funds, and sovereign wealth funds, endowments and family offices still dabbling in the market, royalty companies, horizontal integration, banks and credit agencies, governments, and various combinations thereof.

In an interview after the session, Murray said “While it may appear doomy for mining houses seeking to raise money in today’s current environment, the reality is that the world fundamentally needs investment in mining. Good quality projects can attract private capital if companies are prepared to go to alternate sources and present a compelling strategy.”

In the middle of the session, Capstone Copper CEO John MacKenzie spoke about such a strategy, accessing the full capital stack, to include what might be considered alternate sources. “In the past nine years (at Capstone) I’ve been fortunate to experience a great variety of the different sources of capital that exist in the industry,” he said.

His first example centered on two Chilean mines that had expired as oxide operations roughly a decade ago but presented the opportunity “to reinvest in them to develop the sulphide deposits and to create low-cost long-life mines out of them.” The public markets “didn’t appear open and available at that stage to be giving us the sort of runway we needed to develop these projects.” The miner “sold a small silver stream at Mantos Blancos to Osisko at that stage.”

The next example focused on debottlenecking and expanding a concentrator. “We financed that through an offtake-linked financing with Glencore, with a small copper royalty with a company called Korea (Resources Corp.) and with a slight increase in the silver stream to Osisko,” MacKenzie said. The next stage was an $870 million project that involved “building the concentrator at Mantoverde.” That required partnering with “Mitsubishi Materials from Japan for 30%.”

The arrangement was complex. SocGen and Mitsubishi “led a consortium of banks, which provided us with a project finance facility of about $250 million. It was five different banks. It was two export credit agencies,” he said. It proved to be “the right model in terms of giving us the runway to develop that project,” which is currently being commissioned.

Capstone Copper’s Capstone Mining merged with Mantos Copper and was reverse-listed on the Toronto Stock Exchange. “It moved us from having two companies each with two operating assets to one company with four operating assets,” MacKenzie said. That had the bonus effect of reducing risk, to which investors are adverse. “Single-asset mining companies are inherently risky,” he said. “I do think that creates a far better investment proposition.”

RCF Head of Fund Jacqueline Murray said the emergent capital stack includes investors that are more discerning and ruthless, and they adhere to the green transition, critical minerals, and Agenda 2030 narratives. (Photo: PDAC)

More recently, “we’ve done a board deal for $250 million that’s going to fund some of our future high-growth projects,” MacKenzie said. “We’ve got basically brownfield debottlenecking and an expiration program that we’re driving,” he said. “We’ve very recently done a secondary listing on the Australian Stock Exchange.”

For Santo Domingo, Capstone is “planning on bringing in a 30% partner. Again, that might well be a sovereign wealth fund from the Middle East,” he said. “It could be a Japanese smelter or trading house, or we’ve had a bit of interest from a few other parties around the globe.”

Capstone’s journey “has been one of multiple different approaches to financing and I think each one has its relevance at a specific point in time, a specific point of where a company is at or a project is at,” MacKenzie said. “And ultimately also, what can a company afford? Certainly originally when we set up the business my view was we didn’t have the scope to be highly geared,” he said. “I’m certainly not a big fan of excessive leverage in our industry. I think in the cyclical industry, what looks good when prices are higher can kill the company when prices are low.”

Beyond those used by Capstone, the full capital stack now includes opportunities from a form of horizontal integration. “I think the end-users of our products are increasingly worried about security of supply and increasingly looking to invest to get that,” Murray said. For example, “General Motors has conditionally agreed to invest $650 million in Lithium Americas Corp. to secure access to product.”

The Ruthless, Virtuous Investors of 2030

Attracting investors like GM is complex, Murray said. “The challenge is they’re not used to doing it. They’re not experienced mining investors,” she said. “So it’ll take some time, there’ll be some bumps along the road, but there is a growing source of capital that is seeing the need to go all the way down into mining for that.”

During and after the session, Murray said the trending narratives for the energy transition and critical minerals will drive investment in mining by hedge funds, sovereign wealth funds, endowments, technology companies, governments, and others.

“Despite long-term demand trends, commodity prices are not yet incentivizing enough capital to come into the sector,” she said. “This further complicates long-term supply issues but creates opportunities for investors who invest through the cycle.”

Those investors could include governments. “To spur development and investment into the energy transition, governments around the world are creating new policies and are set to invest roughly $1.87 trillion in funding for energy transition-related projects.” Government is also investing in critical minerals. For example, in mid-May South32 reported it received $20 million from the U.S. Department of Defense to develop its Hermosa zinc-manganese project.

A consequence of the death of retail and the arrival of sovereign wealth funds, hedge funds, and technology companies is these newer sources can be more discerning and ruthless than the public. The session speakers agreed that juniors today have to have top or renowned explorers and leadership, impressive but practical plans, and an optimally located resource to get attention and ultimately funding.

Murray said Pilbara Minerals was one such example. “When we were conducting due diligence on Pilbara Minerals, we were impressed by Ken Brinsden and his team, led on site by COO at the time (now CEO) Dale Henderson.”

PearTree CEO Ron Bernbaum said that charity flow-through reanimates the otherwise cadaverous TSXV, which is down substantially decade over decade. (Photo: PearTree)

The all-star leadership team “had effectively managed campaign operations during low prices to manage cash flow and test alternate processing settings. Commercially, they also managed their relationships with debt providers and had shored up their balance sheet,” she said. “This was a team that could carry the company through difficult times, while simultaneously positioning it to take advantage of better lithium prices.”

Another example is RCF’s investment in Cuprous Capital Ltd., the investment vehicle for the 100% owned Khoemacau Copper Project located in Botswana, which, Murray said, is rated a top-10 jurisdiction by Fraser Institute’s survey of mining and exploration companies.

“The Khoemacau mine has been considered a very attractive project due to its low-capital intensity, a shortage of high-quality copper projects (elsewhere in the world), growing demand for energy transition metals, and the potential for it to become a globally significant copper producer with an expected mine life of 20-plus years,” Murray said. “More than 50 interested parties participated in the sale process.”

Juniors that can’t cut it with the new capital stack face consolidation or extinction, which ultimately could prove to be a good thing, Murray said. “In the true junior and the explorer space, sadly, I think some just need to die so that the good ones can survive and the track the funding.”

An upside to the death, or the flat-lining, of retail is juniors might no longer be tethered to the whims of the public, which is notorious for its short attention span and related penchant for instant gratification. For example, at the keynote for the Society for Mining, Metallurgy and Exploration convention a month before the PDAC convention, it was argued that the energy transition will soon prove to be a fad of the middle classes.

If the West’s middle classes were to face serious economic headwinds, the allure of the pricy energy transition could wane as now wanes its taste for high-end coffee drinks. People will revert to demanding cheap energy as opposed to clean energy. The result could be a reduction in demand for the metals driving the energy transition.

Contrarily, if the primary sources of finance for juniors becomes BlackRock, General Electric, sovereign wealth funds and governments aligned with the United Nations’ 2030 Agenda, then funding linked to the “energy transition is not going away,” Murray said. “Short-term pricing fluctuations are masking long-term growth opportunities” driven by global trends bigger than the whims of the West’s disappearing middle classes.