Joe Mazumdar’s Junior Mining Market Outlook (10.2.17)

Joe Mazumdar, co-editor and analyst at Exploration Insights

Since late 2015, we saw a progression of M&A transactions where mid-tier precious metal producers acquired junior producers, including Silver Standard (now SSR Mining) and Claude Resources, Tahoe Resources and Lakeshore Gold, Kirkland and Newmarket. As the year progressed, we saw more M&A activity directed at developing projects such as Nevsun and Reservoir, Goldcorp and Kaminak, among others. At the time, we came to appreciate the fact that quality deposits, especially in the gold sector, were getting rarer.

The trends in exploration expenditure suggests 20 per cent per year drops from a peak in 2012 to 2015. Also, we note that the proportion of grassroots exploration has been declining since 2003. Exploration as a proportion of revenue for some major producers has been dropping since 2003 to two to four per cent, roughly the equivalent to what is spent on G&A. With the backdrop of declining reserves, due in part to lower reserve prices, producers need to find higher-quality projects.

As a result, we have observed more strategic investments and joint ventures with exploration companies as a proxy for their exploration budgets. At major conferences, we have also seen an uptick of the attendees from corporate development. Therefore, our focus has been on exploration companies and prospect generators with the following attributes:

-Exploring for gold, copper and zinc
-Large-district scale land packages
-Mining friendly jurisdictions
-Potential for a high margin deposit
-Highly qualified management team with relevant experience (deposit, jurisdiction)
-Well-funded for some important catalysts

These tend to be very high risk and high reward opportunities. The sizeable returns to grassroots exploration companies (14) exploring for gold, copper and zinc in predominantly stable jurisdictions over the past year that have averaged around 260 per cent (up to 680 per cent) over an average of two months are the attraction. We have harvested some of our investments and our closed positions in 2017 have provided us around 180 per cent return on average within a wide range of down 60 per cent to up 700 per cent.

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