Money makes the mining sector go round. Given that financings are the only way for explorers to raise money, the way that financings happen is an important topic for the sector.
The process has changed significantly over the last 10 to 15 years. The changes have happened slowly and organically, as opposed to being imposed through regulation or similar, and the mining bear market reinforced the transition by culling the herd of investment banks to a shadow of what it was.
But it’s a transition that I think deserves some attention. It’s certainly a topic that arises in conversation around the sector from time to time, though often in a “what can you do?” tone.
The thing is: there are things you can do, whether you are an investor, a broker, or a public company.
To start you have to identify what changed and why. For this, please let me credit Neil Adshead, a great geologist who had been running a consultancy called Cupel Advisory alongside his equally fantastic geologist wife Nicole Adshead-Bell until just this month being woo-ed back to Sprott.
Neil took the smattering of conversations about how mining finance has changed and synthesized it into two flowsheets, showing Then and Now.
Then, shown below, captures how capital moved in the exploration sector 15 years ago.
Issuers – public companies in need of capital – worked first and foremost with the Sell Side to market their stories. Sell Side captures all the groups that take on a stock and ‘sell’ it to their clients. The push may be simply because a broker finds a stock he or she really likes and so recommends it to his or her clients, or it could be because the brokerage house is doing the company’s financing.
An important part of marketing the story in this model was telling it to the Buy Side, which describes all the actively managed funds that invest in the sector. If a fund liked a stock, its buying could make a major difference.
Placement agents, who vet stocks for the buy side, and capital owners, such as the retail investors who brokers call with the stock push, are also involved – but the Sell and Buy Sides were the heart and lungs of the financing system. If a company couldn’t get a good broker or bank to back the story, odds of a successful raise were limited and the likelihood of attracting interest from the Buy Side was very low.
Of course, the system had to pay everyone. Brokers and funds and intermediaries all clipped fees wherever possible, taking money from both issuers and capital owners.
Fast-forward 15 years. Here is how Neil captures the system today:
First off, the new flowsheet illustrates how the Sell and Buy Side roles have been so reduced. It is no longer the case that having a Sell Side group on your side is the key to financing success. Unbrokered raises are much more common. Direct investments from major miners, royalty players, and various large capital owners are also much more common.
And brokers are struggling under ever-increasing regulations that are choking their ability to do the job they used to do: keep their clients abreast of exciting investment opportunities. Regulators trying to protect investors from themselves are making it harder and harder for brokers to even talk to clients about high risk opportunities, which are of course the bread and butter of the exploration space.
The Buy Side is equally reduced. Mediocre performance plus high costs has made such funds less and less attractive to investors, which means the funds themselves are shrinking and disappearing. Those dollars are therefore less important to issuers than they used to be.
Instead of relying on brokers and big funds, capital flows now rely on capital owners themselves. It is a sea change is how the sector runs.
To start, the dollars available directly from Capital Owners have increased.
- Major miners are making more and bigger investments in junior explorers
- Royalty and streaming companies barely existed 15 years ago but now represent a significant source of capital for exploration and development
- Private equity played only a small role in the metals sector 15 years ago but today PE groups are everywhere. If a group can source enough funding internally, they can make investments or even buy and advance assets privately, without all the costs and hassles of being public. Orion and Resource Capital Fund are leading this PE charge in the mining space
- Retail: The rich are getting richer – and are demanding more for their dollars. Retail investors with significant capital to deploy used to always work through a broker, but today such investors are increasingly likely to direct their own investments. They often dislike brokerages for their fees and for being biased to companies that do their financings through that bank, and because a client never really knows where he or she sits in the pecking order (relative to other 10 clients and to the broker’s personal trades). And so today, with online trading and information so accessible, self-directed investing is not only possible but preferable for many.
That last point is why there’s an arrow directly from Capital Owner to Issuers, bypassing brokerages. The arrow does cross one box: Information Sources. This is another area that has transformed entirely in 15 years.
Everyone reading this letter is aware that the internet has more information on mining stocks than one could read in a dedicated lifetime. Neil does a nice job listing the main sources: formal disclosure (news releases), proprietary research, newsletter writers, bloggers, stock forums, conferences, and personal relationships.
Just think how much this has change since the early 2000s. Of course the internet existed, but the scale of information and number of people contributing to and access from it has grown exponentially since then.
All that information means investors can be self-directed today. However, just as the broker system had its pitfalls, self-directed investing is risky. There is a huge range of quality and bias for all of the sources of information listed above; figuring out whether a report or comment or presentation is accurate and independent can take as much effort as assessing the actual content.
But if you have the time (and experience), the paradigm shift in information availability means you can do the grunt work of finding and tracking the best stocks in the sector on your own.
And the fact that many investors are now doing exactly that does two things: explains what junior executives spend a good portion of their time doing (answering questions from self-directed investors) and underlines how important it is for junior companies to engage.
In terms of engaging, it’s not enough to return calls. You have to be present and available wherever investors are. I’m not saying a junior explorer CEO has to spend his day watching the banter on CEO.ca – but if your company comes up in that banter in a significant way, you better have a plan in place to react.
Ignorance is not bliss. Junior companies can’t put their heads in the sand and pretend the internet only offers sanctioned formal disclosures. Doing so leaves false accusations unanswered and, more importantly, precludes you from reaching a host of potential investors.
It’s complicated and full of regulatory pitfalls and time consuming but, if you’re junior company serious about finding new investors and keeping the market accurately informed, you have to find ways to be present.
Of course, this new capital flow model means banks play far less of a role. It is partly for that reason that the list of mining-focused investment banks in Canada has fallen by about half in the last ten years: there just isn’t enough business to keep them all going.
Good brokers still play a very important role in this sector. They help build companies and do their best to helps client portfolios perform. But it’s a harder job today than it used to be and I have lots of respect for those doing it well today.
For investors, the bottom line is choice. There are still very good brokers engaged in the sector who want to help you find, buy, and sell the right stocks. If you have the time and inclination (and perhaps dislike paying $100 per trade – though do remember that brokers have to make money too!), there are ample resources for self-directed investing. The fact that you are reading this means you already understand that.
There are other forces developing that will earn room on this flowsheet. Crowdfunding comes to mind. And while regulators have worked hard in the last 15 years to make life difficult for banks and brokers, 11 they may yet turn their attention elsewhere (such as on the newsletter industry!) and through enforcement change things again.
Whatever happens, investors need to be confident they are getting unbiased information, whether from a broker or a stock forum, banks and brokers need to keep demonstrating the value that they add to the sector if they want to stay alive, and companies need to ensure they’re engaging with all the audiences out there, not just the ones tuned in to established stations.