"The Generalists Are Coming" - Why Wall Street Is Now Funding Junior Miners

Key Concepts

• News Flow Seasonality: The predictable patterns of news releases and their substance throughout the year, often correlating with capital raising cycles and operational periods (winter/summer).
• Capital Raising Cycles: Periods when companies actively seek and receive funding, typically in the fall after summer results and before winter work.
• Q3 Earnings Reporting: The period when companies release their third-quarter financial results, which has recently passed, leading to thinner news.
• "Look at Me" News: Less substantive news releases intended to keep investors engaged during slower periods, such as announcements of upcoming drill programs or surveys.
• Flow-Through Shares: A Canadian tax incentive allowing investors to deduct exploration expenses, requiring companies to deploy raised capital within the same fiscal year (December 31st deadline).
• Tax-Loss Selling: The practice of selling depreciated assets before year-end to offset capital gains, historically a driver of weakness in resource stocks.
• Seasonal Downdraft: A typical period of market weakness in November and December, historically influenced by tax-loss selling and reduced liquidity.
• January Rally: A historical tendency for small-cap stocks, including resource equities, to perform well in January.
• Project Development Funding: The ability for companies to secure full project financing (debt and equity) to develop their projects independently, rather than relying solely on takeovers.
• Cost of Capital: The expense of raising funds, which has been decreasing for both debt and equity in the mining sector.
• Generalist Investors: Broader market investors who are increasingly entering the mining sector, often investing in larger financings.
• Nine-Figure Financings: Equity raises exceeding $100 million, which are becoming more common in the resource sector and indicate increased institutional interest.
• Definitive Feasibility Study (DFS): A comprehensive study that provides a detailed assessment of a project's technical and economic viability, crucial for securing project financing.
• Streaming and Royalties: Financing mechanisms where companies sell future production or revenue streams, often at a higher cost of capital than traditional debt.
• Permanent Capital: Investment funds with no redemption deadlines, allowing them to take advantage of market dislocations.

Market Outlook and Seasonal Trends (November 19th)

The discussion, recorded on November 19th, focuses on the market outlook for the remainder of the year, particularly the next month leading up to the Christmas season.

• Reduced News Flow Substance: Sam PZ and D First anticipate a period of "light on substance" news flow. This is attributed to the completion of Q3 earnings reporting and the upcoming holiday season, which typically thins out trading volumes. Companies that recently raised significant capital in September and October are expected to issue "look at me" type announcements, such as planned drill programs or soil surveys, to keep investors informed and engaged.
• Capital Raising Cycles and Winter Work: News flow cycles are seen to correlate with capital raising and operational periods. Companies typically raise money in the fall after reporting summer results, with the intention of deploying this capital during the winter months.
• Seasonal Weakness and Buying Opportunities: The speakers believe that the typical seasonal weakness in the market, which they predicted to last until mid-November through the end of December, presents buying opportunities. The upcoming Federal Reserve meeting in early December is also noted as a potential catalyst. This period is seen as an opportune time to "top up" positions at good value before Q1, which is historically a strong period for commodity-related equities.
• Absence of Tax-Loss Selling: A significant departure from previous years is the perceived lack of substantial tax-loss selling. Historically, this practice, driven by US institutions with October 31st year-ends, would begin after the Denver Gold Show and continue through November. However, with most resource stocks being substantially higher year-to-date, the incentive for tax-loss selling is diminished. This suggests that the usual deep discounts seen in November and December might not materialize this year.
• Impact of Holiday Spending: The speakers highlight the seasonal strain on personal finances due to Thanksgiving, Black Friday, and Christmas. This reduction in "marginal dollars" available for investment can impact market liquidity and pricing, especially in less liquid markets where the last marginal dollar sets the price.
• Opportunity for Professional Investors: For investors with permanent capital, like Olive Resource Capital, this period offers an opportunity to take advantage of temporary dislocations and "pick away" at favorite stocks or initiate starter positions at attractive entry points. The principle of "making money when you buy" is emphasized, highlighting the importance of aggressive initial purchase prices.

Flow-Through Share Dynamics

• Year-End Deployment: A key aspect of flow-through shares is the requirement for companies to deploy the raised capital within the same fiscal year. This creates a "race against the clock" in December for funds to allocate capital to eligible issuers.
• Down-Cap Strategy: As the year progresses, flow-through funds tend to move down the market capitalization spectrum, deploying capital into larger companies earlier and then working their way down to smaller ones. This will likely lead to increased news flow related to smaller flow-through deals later in the year.

Shift in Project Development Funding and Capital Availability

A significant theme emerging from the discussion is the changing landscape of project development financing in the mining sector.

• Troyis Example: The expansion of Troyis' debt facility is presented as a pivotal development. Despite raising $172 million in equity earlier in the month, which would typically be sufficient for project development, Troyis is seeking a larger debt mandate. This signals a market where companies can secure comprehensive funding for their projects, reducing reliance on takeovers.
• Decreasing Cost of Capital: The cost of capital for project development has materially decreased. This is attributed to factors like the German guarantee for Troyis' copper component, which has lowered the cost of debt.
• Contrast with Past Projects: Historically, mines built in recent years often relied on "exotic private equity structures" and high-return financing from entities like Orion Mine Finance, resulting in 20%+ returns. Projects like Artemis' Blackwater, Greenstone, and Skita are cited as examples of complex financing structures.
• Return to Traditional Financing: The speakers suggest a return to a more traditional debt-equity package for project financing. This is driven by the increased profitability of mines (with gold at $4,100) leading to a lower cost of capital, a fundamental principle of finance.
• Reduced Reliance on Streaming/Royalties: The improved debt financing for Troyis may allow them to reduce or eliminate the need for expensive streaming or royalty agreements. This makes the project more attractive for potential takeovers post-construction, as it avoids "permanent impairments" on the project.
• Attractiveness for Takeovers: Historically, companies like Malartic and Detour, built with more traditional financing packages without royalties, were more attractive takeover targets.
• Equity Cost of Capital Reduction: Beyond debt, the cost of equity capital has also decreased. This, combined with increased availability of equity, is unlocking choices for companies to pursue independent development.
• Nine-Figure Financings and Generalist Inflow: The increasing frequency of nine-figure financings is a strong indicator of broader market interest. These large financings are often placed with non-resource funds, suggesting that "generalists are coming" into the mining sector.
• Ivanhoe Mines Example: The $250-500 million equity financing by Ivanhoe Mines two years prior is recalled as a significant moment, signaling institutional money looking into mining. This was followed by other nine-figure financings, including for First Quantum, indicating a sustained trend.
• Down-Cap Movement of Capital: The increasing flow of this larger capital down into smaller-cap companies, such as Troyis (a developer, not a producer), is a positive sign.
• The Need to Build: The fundamental reality of the mining industry is that it is a depleting industry, necessitating the construction of new projects. The current environment appears to be enabling this.
• Equity Availability for Developers: A key change is the increased availability of equity for developers. Previously, raising equity equivalent to three or four times a company's market cap for a billion-dollar build was often not viable. Now, with rising equity values and increased capital availability, this is becoming more feasible.
• The "Threat to Build": The strategy of developers "threatening to build" until someone wants the project more is highlighted. Troyis' progress suggests they are nearing the point of actual construction.
• Canadian Government Focus: Troyis is noted as being a focused project for the Canadian government, which may expedite permitting.

Broader Market Observations and Future Topics

• Benchmark Conference: D First is attending the Benchmark Conference in LA, and a fuller rundown of observations will be provided next week, potentially covering areas beyond copper and gold.
• Tether's Involvement in Royalties: A minor news item mentioned is Tether's increasing involvement in the royalty space.
• Upcoming Episodes: The speakers plan to discuss Q1 seasonality and traditional flow-through mechanisms in future episodes.

Conclusion

The current market environment, while experiencing a seasonal slowdown in news flow and liquidity, presents unique opportunities. The absence of significant tax-loss selling, coupled with a decreasing cost of capital for both debt and equity, is enabling junior and development-stage companies to secure the necessary funding for project development. The increasing participation of generalist investors, evidenced by large financings, signals a broader acceptance and interest in the mining sector. This shift suggests a potential for a sustained uptrend and a period where new projects can be built, a critical need for the depleting nature of the industry.