What do riots in Athens have to do with the price of wooden stakes in the Yukon?
Quite a bit, it turns out. In our globalized world capital markets are spooked by the latest ructions in the Eurozone, and that affects how much investors want to risk investing in junior mining companies. And the Eurozone crisis is not the only worry on money managers’ minds.
There’s also slowing growth in China, austerity drives around the world and Iranian threats to close the Strait of Hormuz to oil traffic if anyone attacks their nuclear facilities.
Exploration is a big part of the Yukon economy. Cristina Pekarik, a mining maven at the Department of Energy, Mines and Resources, estimates that total Yukon exploration spending was over $300 million in 2011. That is a lot of jobs.
Junior mining companies are at the forefront of exploration in the Yukon, accounting for about three quarters of total exploration. That money ultimately comes from investors. And a quick look at the stock markets shows that investors are much less keen on mining stocks than they were even as recently as 2011.
The S&P/TSX Capped Materials index, which is a broad basket of resource companies, rose to around 450 in the first quarter of 2011 only to fall to around 300 now. The Capped Diversified Metals and Minerals index, a more focused look at mining companies such as Capstone (which owns Minto in the Yukon), fell from around 1,500 to 850 over the same period.
Capstone itself traded around $4.50 early in 2011 but is now in the $2.25 zone. Victoria Gold was almost $1.50 in late 2010 but is now about 30 cents. ATAC, Kaminak and Northern Tiger had similar trajectories. Even Kinross, a bigger player with operations from the Yukon to Mauretania, fell from over $18 a year and a half ago to under $9 now.
None of these figures mean that these companies are in trouble. Their properties might end up being highly profitable mines. It’s just to say that mining companies in general are having a harder time raising money.
With everything else happening in the global economy, investors aren’t exactly tripping over each other to give new cash to junior mining companies to explore in the Yukon. Nor do current managers and shareholders want to dilute their holdings in solid properties by selling new shares at low prices.
This kind of up and down has always been part of the resource industry. And it frustrates managers and geologists. After all, the rocks haven’t moved.
If people thought there was gold down there in the first quarter of 2011, a bunch of riots in Greece, or air strikes in Iran don’t change that. You might have a very promising exploration program, only to discover that you can’t raise more money for another round of drilling.
This is where people usually start criticizing the stop/go nature of capitalism and the markets, and our obsession with quarterly results, which make it tough to plan a steady multi-year exploration program. In times of market mayhem, other models can have advantages.
Big mining conglomerates have operating mines with positive cash flow in other parts of the world and can invest in exploration. Big state-owned Chinese mining companies, with access to almost limitless cheap loans from the government, have the ability to plan in the very long term indeed.
If some juniors are frozen out of the capital markets for a long time, they may be forced into deals with majors or acquisitive Chinese players. We shall see.
The impact of lower exploration spending on a relatively small economy like the Yukon’s can be very large. Compared to last year’s figure of over $300 million, Mike Kokiw, executive director of the Chamber of Mines, recently told a local radio station that he estimated exploration spending was down “30 to 40 per cent” to around $200 million.
There are various scenarios out there. Some expect the figure to come in higher than $200 million, since the fundamental demand from China and India for commodities is still very solid. A federal government survey suggested that as recently as late 2011, exploration spending intentions were in the $285 million zone for 2012.
But others wonder if we might revert to a figure around $150 million, which is roughly the average over the last six years, according to Ms. Pekarik.
Since almost all the money invested in exploration comes from outside the Yukon, taking a hundred million – or more – out of an economy with a gross domestic product of around $1.5 billion can make a big difference. The impact will be spread widely, from helicopter pilots and geological consultants to hotels and restaurants.
You’ve already missed your chance to make a fortune shorting Yukon mining stocks over the last year and a half. But you might have a second chance, since who knows what the impact a smaller exploration sector will have on the Yukon economy and, you never know, Whitehorse house prices.
Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.