Junior exploration companies in Australia are facing an uphill battle to find the next wave of discoveries that will become mines to meet surging global demand for a plethora of commodities.
There is a shortfall of battery metals and critical minerals needed for global decarbonisation efforts and the electrification of the world’s economy as it transitions from fossil fuels to wind and solar power generation, electric vehicles (EVs), and green technology.
This supply deficit is in addition to ongoing demand for other mainstay commodities important to Australia’s economy in particular, such as bauxite, copper, gold, iron ore, lead, nickel, and zinc, among others.
Over its more than 25-year history, ASX-listed specialist mining investment company Lion Selection Group (ASX:LSX) has seen it all in terms of cycles. The firm’s strategy is to invest in the high-growth early stage mining development space where specialist knowledge is essential.
Speaking to Mining.com.au ahead of Mines and Money Connect Melbourne on 14-15 June 2023, Lion Selection Group Investment Manager Hedley Widdup says despite this need for more mines to come online, investment opportunities and access to capital for juniors has started to dry up.
According to Widdup, junior explorers are enduring lower valuations even while undertaking robust exploration programs and in some cases amid rising commodity prices. Micro-caps in particular that sit below the level of index inclusion are “going cheap, but that doesn’t mean (they) won’t get cheaper”.
In other words, during these challenging economic times, things could get worse before they get better.
Yet, as Lion’s Investment Manager tells this news service, it is far from doom and gloom. He notes retail investors should monitor current valuations but also consider the potential upside when it comes time to sell or collect value from their investment.
“Now, you don’t see a massive declination in the share prices of companies like BHP and Rio (Tinto). There’s definitely institutional interest in those stocks. But the juniors, which are companies that have to raise money in order to do things because they don’t have a revenue stream, they’re suffering. And it’s their valuations which have pulled away.
“If you’re discovering something you might not feel that heat quite so much at the moment, but I think by and large if you’re small, it’s pretty painful for you at the moment”
In some cases, you could say, is it the gold, is it the lithium (plays), is it the this, is it for that? No, I think it’s across the board, they’ve all seen a pullback. If you’re discovering something you might not feel that heat quite so much at the moment, but I think by and large if you’re small, it’s pretty painful for you at the moment.”
Historically, in challenging economic times, gold explorers in particular have found ways to access capital to continue searching for the precious metal. Widdup notes this is not necessarily the case now.
Additionally, there are companies with different levels of cash balances across the sector, but if they are exploring, a capital raising will need to come in the future, which he says remains the underlying issue.
“With the backdrop of inflation, there are lots of people who say, ‘Well, inflation is great for gold’, and to an extent it definitely is, but it doesn’t always play out in a really linear fashion. You do find that when there’s an inflation headline, people go looking for gold exposures, whether that’s them searching for a Newcrest, Northern Star, or Evolution, or they go looking for something where you can get a bit more leverage in the discovery sense.
Although I think if you’re exploring for gold at the moment, the problem is you’re still exploring for something and you need to raise money. It’s not so much that it’s gold that you’re looking for — there’s just not much which is in vogue across the exploration space at the moment, other than the sort of real hot flavour-of-the-month stuff which comes and goes on about the same sort of rhythmicity, (but) it doesn’t stick around for long.”
The dichotomy of demand and discovery
Therein lies a larger issue — if the world is dependent on all these discoveries eventually becoming mines, where will the funds come from now so they will one day be operational?
With an investment horizon of 3-5 years, Lion Selection Group’s investment strategy is to judiciously select a small number of opportunities considered to have ‘excellent’ prospects for development and offer deep value. Over more than 25 years, Lion’s total shareholder return has been 8.2% — almost twice as much as the ASX Small Resources AC Index.
With this overarching view of the market in mind, Widdup says there are several aspects to consider. One is that the market fluctuates and the drying up of funding will not last forever. The other is that the larger end of town often engages in mergers and acquisitions (M&A) to access early stage assets from juniors with a view to fund them through to development once bolted on.
Through M&A, the majors will scale via a large transaction with a peer, but they will also add to their production profile by undertaking deals with a non-producing junior, particularly if it offers access to certain infrastructure.
Widdup says: “I think there’s always a case for some of these companies that might have a process facility in a part of the world which is surrounded by an exploration portfolio, which at some point becomes attractive to (majors), either because their own resources and reserves have declined or because there’s something interesting happening on that exploration ground.
And a great example might be something like you have with Greatland Gold right next door to Telfer, which belongs to Newcrest. And it makes sense for the owner of that plant and the owner of that resource to be the same at some stage in the future. Now, I don’t know who it’s going to be. Will it be Newcrest? Will it be Greatland? But it makes a lot of sense for the 2 to find a way together. So, it’s an example of how a non-production junior, albeit a large-capitalisation one, might be strategically interesting.”
On the flipside, Widdup says, this M&A strategy is not for all majors. Many are likely to find an easier route by investing capital into joint ventures (JVs) or other minority equity investments with juniors.
“We may well see juniors trying to come together to have a one and one equals 3 equation, where you get 2 small miners coming together to become a bigger company…”
Essentially, while institutional investors may be avoiding junior explorers, there are avenues in the market to access funds. The Investment Manager adds that the smaller end of town has capacity to grow scale via deals with their own peers. This could be a route to not only boost valuations but attract investment from institutional investors as a larger entity is created.
“We may well see juniors trying to come together to have a one and one equals 3 equation, where you get 2 small miners coming together to become a bigger company and try to attract some more institutional interest to their register. For me, the biggest story in M&A at the moment is trying to grow onto the radars of the biggest institutions, and that’s right at the top end of the market cap scale.”
Watchful, aggressive, and carefully opportunistic
As Lion’s Investment Manager tells Mining.com.au, the market is such that only a few short years ago, juniors in the sub-producer space found ways to raise funds. He says around 2021, records were broken in terms of capital raised in Australia and on the TSX-V, which are the biggest global equity markets to support listed exploration companies. However, Widdup notes that typically, after such “big years”, there is a tailing off afterwards, which is where the market is at present.
“The most important thing you need to consider as a retail investor when you’re investing now is what’s the price going to be at the point where I start to get interested in selling or collecting value from this. And a lot of retail investors have either an exceptionally long timeframe, almost infinity, because they forget about it, or it’s like a 3-month timeframe because they’re dependent on some news flow to turn this over.
“The most important thing you need to consider as a retail investor when you’re investing now is what’s the price going to be at the point where I start to get interested in selling or collecting value from this”
I think that’s the biggest thing that retail shareholders need to think about — what price will they be able to raise money at next time?”
Lion Selection Group was founded in 1997 to invest in the extremely broad but poorly researched sub-sector of mining — junior resources companies. The firm’s name reflects the culture and philosophy of the organisation, which is watchful and aggressive while carefully picking opportunities.
With an investment portfolio of more than $88 million, the group is well funded to invest, with net cash of almost $77 million as of 30 April 2023.
Its specialist mining investment approach provides Lion shareholders with exposure to the early stage resources sector, with a portfolio that balances risks and is managed by a professional mining investment team.
The group’s monthly net tangible asset (NTA) backing per share as of 30 April 2023 was $0.628 per share before tax and $0.627 per share after tax at a reported share price of $0.465. Since its inception, Lion has achieved ‘market-beating’ performance and generated significant returns.
To register for Mines and Money Connect Melbourne held on 14-15 June 2023 click here.
Write to Adam Orlando at Mining.com.au
Images: Lion Selection Group Ltd
