Canadian Investors High on Marijuana Leaving Junior Miners Down and Out

08 April 2019

Industry investors traditionally attracted to the junior mining space now have a secondary option. Valuations are higher and forecast demand for the product is being touted in the billions. This is creating havoc for Junior Miners who are struggling to find investors.

Investments in Canadian marijuana companies increased from C$43m to C$770m from first half of 2016 to first half of 2017, a massive surge year on year.

Investments in Canadian Marijuana Companies

The marijuana industry is the hot new space, with the promise of growth and returns that has investors enamoured. But can the cannabis industry be the only reason for the mass exodus of investors out of mining?

There are a number of scathing reports with some analysts believing that it’s more than just marijuana that is causing the headaches for Junior Miners. John Kaiser, Junior Mining Analyst believes we could be heading towards ‘an institutional, structural collapse at multiple levels’. One might describe it as a perfect storm of synchronised industry movement that is will need to see Juniors seek funding elsewhere.

Despite the reasons, the reality of today is that equity markets are getting worse for Junior Miners. From the data BDO has pulled from the TSX, the number of new listings on TSX/TSX-V of mining companies have decreased by 20.28% from 2018 to 2017.

Year Number of NEW Mining Companies Listed
2018 55
2017 69
2016 40
2015 29

Source: TSX

The problem of declining investment in exploration is the risk that demand will ultimately outstrip supply causing price spikes and market volatility. Forecast demand for metals in a world driven by the electrification of industries will inevitably go up. However, without Junior Miners being able to secure the right capital, the industry will forever be stuck in the boom bust cycle.

BDO attended PDAC last month where discussions around the conference explored possible alternative sources such as moving away from Canadian exchanges towards the exchanges in London or Australia. Commodity streamers and royalty investors were very visible and whilst there may be a view that this is a very expensive option for many juniors, in some cases it may be the only option.

Interestingly, exploration expenditure has been increasing despite the difficulty in being able to raise funds but this increase has been in established areas not on greenfields projects. It appears that companies with more advanced projects, where the risks are lower, are finding it easier to attract risk capital. However, if new greenfields projects are not being explored that reduces the number of new projects that will be developed in the future, again causing a glut in the market.

We also note that Juniors’ financing by exchange has decreased by 58% for TSX and 23% for TSX-V from 2017-2018.

Juniors' Financing by Exchange ($B)

More evidence to indicate that Juniors are finding it hard to secure equity is the declining number of financing transactions on TSX-V which saw a 25% decline in 2018*.

Probably the biggest indicator that cannabis has taken over junior mining is the evidence of the change in market share. Mining companies on TSX-V have been decreasing while market share of cannabis companies is increasing. Bloomberg’s Jen Skerritt stated in a recent article that “almost half of the country’s marijuana firms started out in the resource sector”.

Year Market Share of TSX-V (by Quoted Market Value)
Mining Cannabis
Jan 2019 35% 13% (Cannabis Only)
19% (Life Sciences)
Dec 2018 39% 15%
Dec 2017 45% 13%

More startling evidence is the volume traded (in shares) on the TSX-V has been showing a trend of life sciences companies catching up to mining companies. A fairly steep decline from 2017 to 2018, with a proportionally higher increase in life sciences. 

Year Volume Traded on TSX-V (shares)
Mining Life Sciences
Jan 2019 1.6b 0.7b (Cannabis only)
2018 22.4b 10.8b
2017 27.7b 6.2b

The evidence is compelling that risk capital has found a new home. The question now is how and where will Junior Miners find the capital they need to sustain their businesses?

* State of Mining Finance 2019: At the Crossroads issued by the Prospectors & Developers Association of Canada (PDAC) and Oreninc