Is Canada’s mining industry in decline? #CanadaFinance

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Canada’s mining industry let out a collective groan after the $2.15-billion sale earlier this week of Toronto-based Osisko Mining Inc., which owns one of the largest, highest-grade undeveloped gold deposits in the world.

Chief executive John Burzynski couldn’t complain about the outcome; everyone who invested made money, he said. But his original goal, when he started looking for a bonanza in Canada about two decades ago, was to build a new Canadian mining giant.

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Instead, the opposite happened. He discovered the Windfall gold deposit in Quebec and South Africa’s Gold Fields Ltd. promptly swallowed it up before it even became a productive mine.

“When we started out, our (goal) was to build a big company. Ultimately, we’ve ended up feeding the growth of what have become the big companies,” he said. “Throughout my career, I’ve watched, almost in horror, the decline of the Canadian mining industry. They’ve all been tipped over and sold to foreign interests.”

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It’s a common refrain in the Canadian mining industry, which is still processing the hangover from a wave of consolidation and acquisitions roughly two decades ago that wiped out many of the country’s largest mining companies. Now, some of Canada’s richest mines are managed by executives working for foreign-owned companies with headquarters in Switzerland, Brazil, Australia and elsewhere.

Although that tied into a wave of globalization that affected every industry in most countries, Canada’s mining sector has long viewed Toronto — and, to some extent, Vancouver — as a global centre of mining finance and still aspires for it to play that role.

By some measures, Canada’s mining industry has spent at least a decade without any growth. For example, the mining and exploration companies listed on the Toronto Stock Exchange and TSX Venture Exchange collectively raised $6.8 billion in equity capital on average through the first half of 2024 and $4 billion in the same period in the prior two years.

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If anything, we’ve become a reliable supplier of world-class deposits for strong companies

John Burzynski, Osisko Mining CEO

That’s roughly on par with the $5.4 billion raised in equity capital in the same period in 2014, the $6 billion raised in 2015 and the $5.3 billion raised in 2016. But after accounting for inflation, some industry executives say it’s clear the industry is actually shrinking.

It’s an even worse predicament in the view of people such as Burzynski, who say Toronto’s Bay Street used to be lined with investment firms looking to inject capital into mineral exploration and mining projects, but structural shifts in the marketplace destroyed that economic ecosystem and have made it all but impossible to build a homegrown mining giant.

“If anything, we’ve become a reliable supplier of world-class deposits for strong companies,” he said about his team. “It wasn’t in the business plan back in 2002. We were always going to be that company” that discovered and purchased world-class deposits.

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Discovering and then selling a world-class deposit has now happened to him twice. In 2006, he started redeveloping the Canadian Malarctic mine in Quebec under an earlier iteration of Osisko Mining, but a hostile takeover forced the sale of that company in 2014 for $4.3 billion.

Today, that mine is a centrepiece of Toronto-based Agnico Eagle Mines Ltd.’s portfolio, and it produced 603,000 ounces of gold and 300,000 ounces of silver in 2023, making it one of the world’s largest precious metals mines.

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“That was very bitter,” Burzynski said about the 2014 sale. “Every major mining company forms around a world-class deposit; that would have been our springboard. But having sold that and being a little older, it gets more difficult all the time.”

Exactly what ails the mining sector is a matter of debate. Within the industry, some blame regulations and a lack of government support; others say investors have fled the sector for other investment opportunities such as cannabis or cryptocurrency companies.

Whatever the answer, it’s a question that is gaining traction in wider circles as provincial and federal governments attempt to lure automakers and technology companies to build out an electric vehicle supply chain in Canada by promoting the country’s proximity to a critical mineral supply chain — a potential problem given that supply chain may actually be shrinking.

The slow pace of growth of new critical mineral mines has been flagged by everyone from government officials to mining industry lobbyists.

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“Compared to the rate Canada opened mines in the past 15 years, we need to move forward more than five times as fast to meet the EV battery factory demand,” a June presentation from Natural Resources Canada said.

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It estimates that by 2035, recycling will only be able to supply five per cent to 10 per cent of the country’s need for critical minerals and that 15 new mines need to be built in Canada over the next decade to meet the demand for raw materials that will be created by the four battery cell manufacturing plants slated for construction here.

If you want to produce more critical minerals like now, now, then you need to look at how you can support existing operations to expand

Photinie Koutsavlis, vice-president of economic affairs and climate change at the Mining Association of Canada

“What we’ve been pushing the government on is that if you want to produce more critical minerals like now, now, then you need to look at how you can support existing operations to expand,” Photinie Koutsavlis, vice-president of economic affairs and climate change at the Mining Association of Canada (MAC), said.

To that end, she said the industry is asking for modifications to a tax credit that currently allows companies that mine critical minerals to write off 30 per cent of the cost of new machinery and equipment. MAC wants the tax credit expanded to include things such as building a new mining shaft and electrical work so that existing mining operations can increase their output.

MAC’s annual report cites a variety of challenges for the sector, including the lengthy time between the initial discovery of a deposit and first mine production, which it estimates at more than 17 years, and the lack of workforce diversity, which threatens to create labour shortages in the future.

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“This is an area of struggle for our sector, which continues to be predominantly white and male,” the report said.

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Where MAC and many others in the mining industry find common ground with Burzynski is that they all say it’s increasingly difficult for mining exploration companies to find investors.

That’s a reversal from the past, when discovering a motherlode deposit was considered to be the trickiest part of the job, not raising money.

Burzynski said that as his company modelled out the Windfall deposit — eventually finding 4.1 million ounces in the measured and indicated category at a grade of roughly 11.4 grams per tonne — raising money became his chief hurdle.

The advent and rising popularity of exchange-traded funds means that more investors are choosing passive investment and putting their money into funds that hold a basket of companies rather than just one. Under that model, their funds are used to buy shares on the open market rather than through offerings in which the funds flow directly back to a company.

That’s a critical difference for an exploration company, which typically doesn’t have any sources of revenue. Rather, they create value by modelling geologic deposits that can eventually be mined, though that takes years.

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“You used to go to the midtown conferences or the banks would come up and say, ‘Hey, can I offer you a bought deal for 50 million bucks? Because we’ve got a lot of people who want to invest in gold,’ and you say yes, and you go out and you drill,” Burzynski said. “A lot of that has disappeared as a thing of the past; the investor class has gone missing.”

He said his company had raised about $1 billion since 2015 on equity markets, about one-third of which came through charity flow-through investments. Under this program, a ‘donor’ purchases flow-through shares and gives the shares to a charity, which then sells the shares. The donor can then claim a tax credit against the purchase.

With capital scarce, exploration companies are turning to royalty companies, which provide a form of project finance by offering big swaths of cash in exchange for a future share of the revenues or metals produced from a mine.

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“That effectively creeps off the future profit of a mine,” Burzynski said.

There are, of course, people who see the problem differently.

Dean McPherson, head of global mining at TMX Group Ltd., which runs the Toronto Stock Exchange, agreed that passive investment and royalty companies have had an impact on the mining sector, but on other sectors as well.

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The Canadian mining sector may not be raising more capital than it did a decade ago, but the entire market has suffered, he said.

For example, the $6.8 billion in equity capital raised this year by the mining sector through June accounted for more than half of the $12 billion raised by all sectors.

“That’s something I always point out to people,” McPherson said. “All the capital markets are struggling. On a relative basis, mining is doing well.”

Those days are gone. It’s a lot more sophisticated now

Dean McPherson, head of global mining at TMX Group

But he said the business of mining and exploration has grown more difficult, especially because permitting is more rigorous. Environmental protections have grown, as has the responsibility to consult with local communities, including local Indigenous groups, who in the past may have been ignored.

McPherson also said that within the mining sector, and for gold companies in particular, many companies overpaid for assets during the last boom cycle a decade ago, and those deals took years to digest, during which time investors fled the sector.

“People keep comparing it to 20 years ago, when you could just stand in a basket and talk about any project you’re excited about and get a pad of money,” he said. “Those days are gone. It’s a lot more sophisticated now.”

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Nonetheless, the industry is sensitive to any policies that inhibit investment, especially the federal government’s recent use of the Investment Canada Act to block Chinese investors.

At least one mining exploration company has already closed its office in Canada after facing questions about an investment from a Chinese company. At the end of June, Falcon Energy Materials PLC — formerly known as SRG Mining Inc. — relocated to Abu Dhabi, United Arab Emirates, from Quebec, although it remains listed on the TSX Venture Exchange.

Falcon is developing a graphite deposit in the Republic of Guinea, and last July, it announced a comprehensive deal with a Chinese company to partner on technology and for the Chinese firm to make a $16.9-million equity investment for 19.4 per cent of Falcon.

Mathieu Bos, chief executive of Falcon, said the deal was intended to take advantage of the technological expertise that China’s mining sector has developed in battery manufacturing.

“They’re just 15 years ahead in China in terms of how to produce high-quality, low-cost battery materials at scale; that’s what we want to leverage,” he said.

But in March, Falcon terminated the deal in the face of scrutiny from the federal government. By moving the company’s office to Abu Dhabi — even though Falcon remains listed on the TSX Venture Exchange — the federal government may no longer have jurisdiction to conduct investment reviews, he said.

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Benoit La Salle, executive chairman of Falcon, said that relocating the head office to Abu Dhabi has also opened doors to new investors.

“Abu Dhabi is the new London or the new New York, the new international money or financing platform,” he said.

Some see Falcon as only the first exploration company that will eventually move out of Canada to the U.A.E. in search of capital.

“I expect that more companies are going to look to redomicile,” said Joshua Krane, a foreign investment lawyer at McMillan LLP.

But the legality of the government’s efforts to restrict Chinese investment is also facing pushback.

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In July, a subsidiary of a Chinese state-owned mining company challenged Canada’s jurisdiction to even review its $300-million acquisition of the La Arena gold and copper mine in Peru from Vancouver-based Pan American Silver Corp., according to a report by the Canadian Press.

Krane said the outcome of that case could provide new guidance on the scope of the Investment Canada Act and whether the federal government has jurisdiction to review investments and deals involving overseas assets.

For Burzynski, who spent years working on mineral exploration in Africa before returning to Canada in the early 2000s, his goal was to discover deposits and build a new company. But the challenges and stumbling blocks changed along the way.

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With the Canadian Malarctic mine, he said his company drilled the first exploration hole in March 2005 and poured the first brick of gold in April 2011 — a six-year timeline. He drilled the first hole on Windfall in 2015 — about nine years ago — and doesn’t expect to pour the first brick of gold for at least a couple years. That means the timeline is nearly twice as long.

The lag is partially due to a lack of market enthusiasm for the project. Even though gold prices have hit record highs of above US$2,500 per ounce, it hasn’t always translated into share price increases for his company or other mining companies.

As Burzynsl put it, the company’s share price “flatlined” at about $3 per share, which meant that raising money by issuing new shares would have resulted in dilution to shareholders.

“If this was the last cycle, I guarantee we would have hit 50 bucks (per share) a half dozen times,” he said.

Last May, Osisko struck a 50-50 joint venture partnership with Gold Fields to develop Windfall, which Burzynski said put the company on the path to a sale.

He called the sale a “very satisfying” outcome in that Gold Fields will pay a 55 per cent premium to the company’s 20-day volume-weighted trading price as of Aug. 9, which means shareholders will make a profit.

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“It’s a very comfortable outcome for all involved,” he said.

But Burzynski predicted there will be a problem in the future for Canada’s mining industry if it remains this difficult for mineral exploration companies to raise money.

“What’s been happening in Canada is there just hasn’t been enough new money put into the junior explorers to go out and find things,” he said. “It’s like a food chain; you disrupt the lower part and then it all collapses at the top in 10 years’ time.”

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