Mutual dependence between majors and juniors
Investment by major mining companies can form a significant portion of the funding junior explorers depend on to advance their early- and development-stage projects, while the majors depend on positive project outcomes to maintain their future production.
The most common form of investment is a staged "earn-in" agreement to acquire a share in a promising project, where the major funds some or all of the junior's exploration activity through agreed-upon milestones, such as an initial resource estimate, a preliminary economic assessment or a full bankable feasibility study. Investment may take the form of a direct joint venture in a project, or the major may acquire equity in the junior company itself. Less frequently, the major will make an outright purchase of the entire project or even take over the junior company.
The mining industry made a remarkable recovery shortly after the 2008 market crash, and acquisitions of all types soared to a 10-year high in 2010. However, a period of sharp decline followed, as metals prices collapsed under the weight of surpluses and shareholders shied away from the mining industry, especially investment in the junior exploration sector. The weak market for metals persisted into early 2016, but has since showed encouraging signs of improvement.
During the period of sharp decline from 2012 through 2014, intense scrutiny by their shareholders forced the majors to reduce spending of all kinds. Although they cut back on purchases of exploration projects, some opted instead to purchase equity in junior owners of promising projects.
Cautious revival in majors' exploration sector M&A
Mindful of their long-term project pipeline needs, majors began increasing their acquisition of equity in exploration projects in the last half of 2014, and by the first half of 2017 were buying into projects in far greater numbers than in 2012. By contrast, the majors' investment in junior companies hit bottom in the second half of 2015. It was perhaps the darkest time for the junior sector during the latest downturn, and it was also a period in which the mining industry's aggregate market capitalization fell back to the lows recorded between late 2008 and early 2009. Investing in junior explorers became riskier than investing in the projects themselves. Although spending restraint remains the order of the day, the majors' recent resumption of project acquisition likely signifies that they have more capacity for smaller, less risky, but potentially rewarding acquisitions. A slight improvement in metals prices has helped justify the increase in acquisitions.
As a further inducement to spend, the deepening crisis among juniors also created a buyer's market for the major mining companies. Many promising projects that would have attracted market investment in better economic times became vulnerable to targeted investment or to acquisition from cash-strapped juniors struggling to survive. Opportunistic buying by the majors, especially of gold projects, likely accounts for many of their project acquisitions since 2014.
Teck Resources Ltd. has been by far the most active acquirer during the five and a half-year period, with 49 investments, primarily focused on copper and roughly split between project and company acquisitions. Agnico Eagle Mines Ltd. and Goldcorp Inc. share second place with 32 acquisitions each, almost entirely focused on gold. Barrick Gold Corp., Newmont Mining Corp. and Rio Tinto share third place with 17 acquisitions each — the first two focused on gold and Rio Tinto investing in a diverse range of commodities, primarily copper.
Majors' acquisitions likely to increase
The strengthening of metals prices in 2016 through the first half of 2017 has continued to increase optimism in the industry. Although overall exploration spending by all company types remained low in 2016, the major companies increased their share of the industry's early stage exploration budgets to a record level (partly due to lower budgets by the junior sector), which coincided with an increase in their acquisitions of both exploration-stage projects and junior explorers. The outlook for the remainder of 2017 and for 2018 is for further increases in major company investment in junior companies and their projects.
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