In recent years, Canada’s resource sector has increasingly recognized the importance of China as a market for its natural resources, to the point where China is now Canada’s second-largest trading partner. Despite the demand for natural resources, stock prices of Canadian junior miners have slumped, and Canadian investor appetite for equity financings of these companies has significantly declined. As such, it has been challenging for Canadian junior miners to secure financing for the exploration and development of their projects at home and around the world. Mining companies have tried to wait out these adverse market conditions and have been reluctant to conduct dilutive financings at low stock prices. However, as stock prices have not recovered, the tenuous financial state of many companies is forcing them to seek funding.
So where can junior mining companies look for financing? There will certainly be continued investments into juniors from major Canadian and international mining companies, but the number of such investments may be limited as some of the majors address their own issues, such as cost overruns from the development and construction of their large-scale mining projects.
One source of financing some Canadian juniors may be overlooking is China: both state-owned and private enterprises, which have access to funds and an interest in investing in the mining sector. Chinese companies have made many equity investments into Canadian resource companies during the past year. While much attention has focused on China National Offshore Oil Company Ltd.’s proposed $15-billion dollar acquisition of Calgary-based Nexen Inc., there have also been many smaller-scale deals, such as the $4.4-million equity investment made by a subsidiary of Minmetals Resources Limited in Vancouver-based Sama Resources Inc.
In addition, Chinese enterprises have representatives based in Vancouver. Their mandate is to oversee investments already made into Canadian mining companies and projects, and to scout for new ones. It’s not a matter of if, but which Canadian mining companies will receive investments from Chinese enterprises.
Common features of some of the investments made by Chinese enterprises into junior mining companies have been “toehold” acquisitions of either slightly less than 10 per cent of the issued and outstanding shares (so that the investor is not an “insider” under applicable Canadian securities laws and would not need to publicly disclose its investment) or slightly less than 20 per cent of the issued and outstanding shares (such that shareholder approval of the junior mining company would not be required and takeover-bid provisions would not be triggered, either of which would delay and add regulatory hurdles to the investment).
Chinese investors often negotiate a seat or two on the board as well as a right to participate in future financings to maintain their shareholding level. There have also been investments at the project level, where Chinese investors have purchased an interest in the project itself and have become joint venture partners in its exploration and development. Chinese investors often call upon their nation’s banks to finance some of the larger-scale investments, and the access to this type of financing can also be included as a commitment from the Chinese investor. Finally, Chinese investors have often negotiated offtake agreements where they would contract to acquire the minerals produced from the mine.
So how does a Canadian junior mining company meet potential Chinese investors? It’s all about relationships. For instance, a company could send delegates to major mining conferences that attract important Chinese mining companies and investors, such as the annual Prospectors and Developers Association of Canada Convention held each March in Toronto (commonly referred to as “PDAC”), or the annual China Mining Conference (often referred to as “China Mining”) held each November in Tianjin, China (as well as other mining investment conferences held during the same week in Beijing), or the Hong Kong Mines and Money Conference held each March. Such conferences are invaluable in facilitating the introduction of mining companies to potential Chinese investors.
It’s also important for Canadian juniors to retain Canadian legal counsel with a strong knowledge of China and strong Chinese language skills. It further helps if the Canadian law firm has a presence in China.
As the bargain prices in the junior mining sector continue, and despite concerns about the cooling of China’s economy that many in China’s public and private sector do not share for the longer term, Gowlings foresees a continued trend of junior mining investments from Chinese investors. Increased Chinese consumerism and urbanization and the rise of the country’s middle class portend a long-term demand for natural resources that Canadian mining companies are poised to help meet.