Golden Opportunity

Geopolitical uncertainty has given a boost to gold markets and Canadian miners. Exploration work and financings are back on the table, and foreign investors are taking notice.

EXCEPT FOR THE ODD moment here and there, the Midas Touch has been missing in action from the gold market for the past five years. But guess what? After watching prices slide sideways or slip downward along with most other mining stocks during the long dry spell — when raising money for gold companies is described by Frank Mariage of Fasken Martineau DuMoulin LLP as “an extreme sport” — investor appetite for gold is quietly rebounding.

There are a few different reasons for the renewed demand, but one that keeps coming up is the US dollar. Seen as the global reserve currency and a safe haven since World War II, that view has slowly been eroding. In recent months, geopolitical tensions have ratcheted up while US consumer spending has come in below expectations — suggesting the American economy is not as strong as the market had been pricing in. Gold and the US dollar move in opposite directions. So any pressure on the US dollar makes gold more expensive for Americans but cheaper for foreign investors to buy — an attractive combination for investors looking to hedge their US-denominated investments.

Sander Grieve, a partner at Bennett Jones LLP in Toronto, says day-to-day fluctuations in the price of gold have been considerable, “and it almost seems right now to be more a barometer of the US administration than anything else.” In other words, the Trump effect. “Anyone who lacks confidence in the US dollar, even if they believe inflation’s coming at some point, and wants to hold something that’s not exposed to dollars, will say, ‘I need some exposure to gold.’ So gold’s certainly alive as a hedge on the US currency,” Grieve says.

The climb in the price of gold has started to translate into a “more normal market” from a law firm perspective, he says — one in which there are financings, M&A activity. There have even been a couple of initial public offerings again and while they haven’t been monster IPOs — Superior Gold Inc. raised $28.5 million, for example — Grieve says, “We perceive it more as business getting back to normal.” That, he says, has been reflected in improved analyst ratings for many gold companies. He points to Detour Gold Corp., an intermediate producer with a mine in Ontario, as one example among dozens. Detour was trading around $14 in the second quarter of the year, up from a low of $2.88 just seven months earlier. “There are lots of them you can look at that were probably 90 cents and are now $3,” he says, indicating there has been not just an investor shift back into the space, but “an extraordinary reset.”

That said, investors are still looking for quality projects and won’t grab at just anything. But when the quality is there, the money follows. For the junior explorers, who have been slowly dying on the vine for the past three or four years, “there does seem to be new hope. There are more material financings coming up and getting done in terms of private placements into explorers where they’re getting capital together again. For quite a while, there was the appearance of putting things on ice and hoping for an improved market. We’re now at the early stages of one.”

Peter O’Callaghan, a partner at Blake, Cassels & Graydon LLP in Vancouver, calls it “a funny market.” While gold outperformed the US dollar by about 10 per cent last year, he says, “I honestly expected it would be by more than that if you look at all the geopolitical issues around the world — the uncertainty created by a Trump presidency, by the weirdness in North Korea, Brexit ... I would have expected that gold would have popped more than it did.” Still, he says, there is no question investment in gold is on the rise.

The money’s coming mainly from the traditional resourced-based investment funds, from specialty investors and from the large investment funds that are prepared to put a little bit of money into gold, “frankly to cover themselves off” so if gold happens to run they don’t look like they dropped the ball, says O’Callaghan.

He wouldn’t call it business as usual: “Investors are still wounded by what happened a few years ago,” but generalist funds are coming back in as well and investing again. He too stresses it has to be a project with decent prospects, not just clutching at straws, and “there needs to be a good management team in place. A lot of investors are looking at the board and management. The cash is there for the right team.”

He says he’s seeing a few foreign investors, especially from China, looking at Canadian gold companies again, but so far they’ve been extremely cautious, and prospective deals aren’t making it across the finish line. Still, O’Callaghan believes there’s a lot of demand in China driven by investors who want to diversify geographically. Gold’s not necessarily easily transportable, but they can buy gold and own it somewhere else, and rely on it if the Chinese economy suddenly goes south. “So it’s a bit of a nest egg, some certainty. It’s an asset class that has a defined value and isn’t subject to the same risks as an apartment in Beijing, for example.” It’s also a way to get money out of the country.

One thing investors everywhere find especially attractive about Canadian gold companies — especially those that explore and produce in Canada — is the low Canadian dollar. But by the second quarter of this year the price of gold was over US$1,265 an ounce — just over $1,700 an ounce in Canadian dollars — which changes the dynamics quite sharply for Canadian explorers and producers. “If you’re producing in Canadian dollars and your costs are in Canadian dollars, that means you can make some money again,” says Mariage. “Economically, you’re there. Just off the top, throw in the exchange-rate piece and it makes jurisdictions such as Canada a nice place to do business.”

The Bay Street investment banks are showing a lot of interest, he says, but he is also seeing renewed interest out of Europe. Many investors appreciate the stability of the jurisdiction compared with some countries in Africa, Southeast Asia or South America, where a regime change or some other condition can lead to a change in permissions and ownership. “Mining is a risky investment,” he says, “so people who invest in mining are always weighing risk against potential reward. When you add uncertainty into the mix, dollars get scared, so if they have a chance to invest in a stable jurisdiction versus one where the laws can change suddenly and licences be revoked, the stable jurisdiction looks like a safer bet.”

There are producing gold mines throughout Canada including in northern BC, Ontario, Nunavut and Québec. In northern Québec alone, for example, there are 10 producing gold mines owned by companies including Agnico-Eagle, Gold Corp. and IAMGOLD, as well as 11 gold mines under development — which means “they are between exploration and operation” says Ann Bigué, counsel at Dentons Canada LLP in Montréal, and some by active producers.

There is a lot of gold in northern Québec, and more and more activity and exploration. She points to Goldcorp’s Éléonore mine in the James Bay region — well north of the 52nd parallel — which is not only an active mine, it is expected to eventually become Canada’s largest gold-producing mine. She says it is giving people the confidence that gold can successfully be mined in that remote location.

In fact, the area around James Bay has been said to be in the midst of a mini gold rush. Much of the exploration is being done by juniors as well as by the producing mines, says Bigué, “because what they want is to expand their reserves. Exploration funding is key. It’s not that easy, but the increase in the gold price has helped and the exchange rate has helped as well.”

Mariage is not surprised that Canada’s Midas touch is slowly reasserting itself. Canada has been mining gold for over 100 years, he says, adding that 65 to 70 per cent of all the gold mines around the world are operated by Canadians. “The knowledge, the sophisticated manpower to be able to put these projects into production at a fair price, we’re known for that.”