How Canada – and Bay Street – squandered the chance to finance the critical minerals revolution

This story is part of Mission Critical, a Globe series that looks at the issues around whether Canada can become a mining superpower in critical minerals used in the clean energy transition.

Also read the most recent story published from the series: While domestic companies flounder, foreign behemoths have built a dominant position in the Canadian critical minerals sector – and few have benefited more than Australia.

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In the decimated junior mining industry, Mark Selby is one of the lucky few. As the chief executive of Canada Nickel Co. Inc., Mr. Selby and his team are developing the Crawford nickel project in Shania Twain country near Timmins, Ont., with dreams of supplying critical minerals to electric vehicle battery makers. The company is still slogging through its permitting phase, and first production isn’t expected until 2027, but at this stage all that matters is Canada Nickel has secured what hardly any of its rivals can: money.

Early this year, the company was able to raise $22-million through a share sale to public investors, and another $24-million through a direct investment. It will need much more to develop the project – likely billions of dollars – but what it’s raised so far could be the difference between life and death, because the financing taps for critical minerals companies are all but shut off in Canada.

Not only are many mineral prices slumping on recent fears that China’s slowing economy will weaken demand for years – nickel is already down 38 per cent since Canada Nickel raised money – but fewer and fewer investors are willing to touch the minerals sector at all. “The pool of money that’s available for mining has shrunk dramatically,” Mr. Selby says.

This disconnect is hard to reconcile. Critical minerals such as nickel, copper and lithium, among others, are crucial for the energy transition, because they are the core materials used in the green power sources such as EV batteries and solar panels. Yet most of the junior mining companies that are hunting for them are barely treading water, unable to finance the next phases of their exploration.

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The industry today is almost unrecognizable to Mr. Selby. He started out two decades ago at Inco Ltd. in Sudbury, Ont., a historic mining town where a giant replica of a 1951 Canadian nickel is a main tourist attraction. At the time, Canadian companies with domestic projects were the envy of the global sector, and in 2006 Brazil’s Vale SA swooped in and bought Inco for $19-billion.

Junior miners also thrived in this era. Scores of mid-sized rivals needed to replenish the reserves they mine each year, so they looked to acquire promising exploration companies. Canada, with its stable politics, rule of law and a history of turning resource deposits into mining juggernauts – including Red Lake in northern Ontario and Voisey’s Bay in Labrador – was one of the best places in the world for junior miners to flourish.

All the excitement seeded an ecosystem. Vancouver and Toronto were global hubs for mining capital, and the annual PDAC conference in Toronto, run by the Prospectors & Developers Association of Canada, was a must-attend event. Junior miners with projects in far-flung corners of the world would list their shares in Canada just to get recognized, allowing Bay Street to feast on the financing fees.

So much of it has vanished – the bankers, the investors and the enthusiasm. In 2010, the mining sector made up 25 per cent of the total value of the Toronto Stock Exchange and the TSX Venture Exchange, more than any other industry. That year, junior miners on the Venture Exchange were able to raise $5.3-billion to fund their exploration and development projects. As of October, they had raised less than half of that, and the sector’s composition of the total TSX has fallen to 13 per cent.

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While financings for all sectors are slow this year because investors are recalibrating after the COVID-19 pandemic tech bubble popped, mining has lost its lustre in the Canadian market. There are fewer investment banks providing research coverage of up-and-coming mining companies, and fewer investment advisers paying attention to the sector. When a junior company tries to raise money, there just aren’t as many people willing to listen to the sales pitch.

The struggle to finance terrifies politicians and diplomats because Canada and the United States are losing the global critical minerals war. “Simply put, we don’t have enough of these minerals today to meet the world’s – and our own – growing demand,” David Cohen, the U.S. ambassador to Canada, said in an October speech.

The worry is that China is hoovering up critical minerals and will use them against the West in a geopolitical provocation, the same way Russia held its natural gas supply over Europe’s head when it attacked Ukraine. Currently, China refines more than half of all nickel, lithium and cobalt worldwide.

How did Canada squander its natural resource advantage? The knee-jerk reaction is to blame Ottawa. Prime Minister Justin Trudeau put climate change and Indigenous peoples’ rights at the centre of his legislative agenda, while often neglecting the mining and energy sectors that are major contributors to economic growth.

It is a juicy narrative, but only a fraction of the truth. Ask around and mining executives and bankers, even the right-leaning ones, admit there’s much more to it. If anything, they’re grateful Ottawa is now pitching in on critical minerals, with initiatives such as a 30 per cent development tax credit in the most recent federal budget.

What brought the junior mining sector to its knees is a multifaceted puzzle. It wasn’t, for instance, just Ottawa that pivoted away from extractive industries. Social norms have changed dramatically over the past decade and shareholders – as well as an entire generation of young voters — have embraced the ESG movement that advocates environmental, social and governance principles.

But nothing compares to the pain Canadian miners inflicted on themselves. The last commodities supercycle was a bubble for the ages, and investors – particularly junior mining investors – were badly burned when it popped in 2012. Politicians can talk about the critical minerals crisis all they want, but until private capital is willing to touch the sector again, all the warnings about China’s dominance amount to little more than screaming into the wind.

How we got here

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The late Peter Munk used to personify Canada’s mining prowess. The founder of Barrick Gold Corp. started cobbling together a portfolio of gold mines in Canada and the U.S. in the mid-1980s, and by 2008 the company had garnered a reputation as a top operator with a market value around $43-billion.

Mr. Munk, a proud Canadian, made sure the world knew Barrick was wrapped in a maple leaf. In the same way that tech giants such as Apple Inc. made Silicon Valley a hub for startups and venture capital, Barrick’s Canadian roots helped to project an image of mining excellence here.

It proved to be a double-edged sword. China unleashed a massive government spending program in the aftermath of the 2008-09 global financial crisis, which created what seemed like an insatiable hunger for metals (hence the supercyle), and Mr. Munk went empire building. Barrick sank billions into developing its Pascua-Lama project, a complex gold-silver-copper development high in the Andes mountains, and spent $7.3-billion to buy Equinox Minerals Ltd., which operated a copper project in Zambia, in 2011.

The gold sector wasn’t enough anymore for Mr. Munk anymore. He wanted to conquer the world.

The hangover hit a year later. Metals prices are notoriously volatile, and their supercycle crashed. Demand just didn’t match the hype. Over a three-year window, Barrick wrote off US$20.7-billion in assets, a large chunk of which came from Pascua-Lama and Equinox. Mr. Munk attributed it to “hubris” and “stupidity.”

He wasn’t alone, though. Across the industry, writedowns totalled more than US$100-billion, and with global majors suffering, junior miners didn’t stand a chance. The residual pain sank the fortunes of investors such as Eric Sprott, a once-prolific hedge fund manager who was known for putting money into mining companies in their infancies. By 2013, Sprott Inc., his publicly-traded asset manager, had lost 70 per cent of its market value, and his flagship fund had dropped nearly 50 per cent over the previous five years.

The way investors thought of Canada changed quickly. Instead of seeing the Toronto Stock Exchange, and particularly the TSX Venture Exchange, where junior mining dominates, as places to earn outsized returns, they started to view them as the best places to set their money on fire. Vancouver’s Teck Resources Ltd., a mining giant that produces copper, metallurgical coal for steelmaking and a few other metals, fell to $4.03 per share in 2016, down from nearly $62 in 2011.

Scarred, portfolio managers who invest in a range of industries, known as generalist investors, started swearing off mining. At the same time, passive investing through low-cost, exchange-traded funds that tracked the broad S&P/TSX Composite Index or the S&P 500 in the United States grew in popularity. Portfolio managers who still wanted some commodity exposure could simply buy the index, which gave some weighting to major producers, or they could buy commodity ETFs that tracked underlying metal prices.

Nothing, though, has devastated the junior mining sector quite like the retreat of retail investors.

“When I got into the industry, there was a lot of excitement,” says Darrin Hopkins, a senior wealth adviser at iA Private Wealth in Calgary, who has been investing in junior mining and energy companies for close to three decades. He still remembers the stories of getting in early on prolific metals regions such as Voisey’s Bay, Red Lake and Dia Met Minerals Ltd.’s Ekati diamond mine in the Northwest Territories.

It was an era when miners lived and died by what’s known as “close-ology,” the wildly popular, but extremely unscientific, art of selling investors on a project that was close to an existing mine with proven reserves. It didn’t matter if a junior company hadn’t yet put out a technical report that could verify its hopes and dreams. Investors were often desperate to get in early at 5 cents per share, to beat anyone else who waited for proof. FOMO – fear of missing out – dominated decision-making.

When the supercycle finally crashed, in 2012, there was blood in the streets. Investors realized their portfolios were stuffed with dogs, yet they couldn’t sell their positions because junior mining stocks are highly illiquid.

This unmasking was painful for Bay Street investment banks such as Canaccord Genuity Group Inc., GMP Capital Inc., Cormark Securities Ltd. and Paradigm Capital Inc., all of which made a killing on advising junior resource companies on financings and mergers during the boom, and from convincing retail investors to invest in these same stocks. Almost overnight, their business leads completely dried up, and some dealers didn’t survive. By 2017, Canada had lost 60 boutique firms, according to the Investment Industry Association of Canada.

Luckily for the investment banks that did make it through, Canada’s cannabis sector started attracting global interest. Canaccord Genuity, for one, went from asking its own employees for cash in 2016 to making many millions of dollars in profit off of cannabis over the next three years.

But what was good for the investment banks only made things worse for junior miners. When Mr. Hopkins was starting out, retail investors who liked speculating “really had two choices: oil and gas, or mining,” he says. “That’s why it was so successful. You had a tremendous about of capital out there focused on two choices.”

It used to be that the best way for retail investors to double their money in a single year was to play in junior resources. But over the past five years, investors have been able to speculate on cannabis, cryptocurrency and tech. And now, even though software startups have struggled, these speculators can still buy Netflix Inc. shares for giant returns – and the stock is far more liquid.

Of course, some investors still want to dabble in commodities, but rule changes have made it harder. So many advisers had put their clients into questionable companies during the heyday, often in exchange for commissions, that retail brokerages had to institute stringent compliance hurdles. In the current market, “there’s a huge onus on the broker to make sure he knows what he is recommending to clients,” Mr. Hopkins says. It all makes for so much paperwork that unless a junior miner has something that is “out of this atmosphere in terms of [early] results, it’s pretty hard to attract attention.”

Couple that with a generational shift away from extractive industries, and junior miners barely register. “Baby boomers loved gold,” says Blair Way, the CEO of Patriot Battery Metals, a junior miner building a lithium mine near James Bay, Que. In the current environment, “if you are running a mining company, your 20-something thinks you’re the devil.”

Navigating the current mess

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Because Canada is so far behind the curve on critical minerals, it can seem like there’s been total and utter neglect of the sector here. It isn’t true, especially not for lithium.

Before the COVID-19 pandemic erupted, Quebec had two promising projects in the works, one by Nemaska Lithium Inc. and another by North American Lithium Inc. The problem, however, was that lithium prices started falling in 2017, and two years later both projects shuttered because their developments had turned uneconomical. Retail investors got burned all over again. “People are deeply scarred by that, and I don’t blame them,” says Mr. Way.

Revival plans for both companies are now in place because the price of lithium soared like a meme stock starting in 2021, and it continues to trade at a healthy level, but Mr. Way says it’s still a struggle to get Canadian investors interested in early-stage projects, such as his own in northern Quebec. Patriot was lucky enough to secure a $109-million direct investment from U.S. chemical producer Albemarle Corp. in July, but its first few rounds of financing had to come through the company’s Australian network.

Mr. Way, a Canadian, is based in Brisbane, and he says there is a crucial difference between the two mining nations, at least for lithium. Australian investors, he says, are much more familiar with the mineral because Australia’s prolific Greenbushes mine opened in 1983, and the country has been shipping raw lithium to China for years. In a way, it is part of their mining identity – a mineral they stuck with even when prices were in the dumps. Canada, meanwhile, only caught on in recent years, then faltered in the first down cycle.

Timing a commodity cycle is what makes financing junior miners through public markets so tricky, says Daniella Dimitrov, a veteran mining finance executive who has also sat on corporate boards. From resource discovery to first production, mines take an average of 18 years to build in Canada, according to S&P Global Market Intelligence. (The global average is 16 years.) Over that period, multiple financing rounds will be necessary, yet metals prices are notoriously cyclical. Patriot’s shares, for instance, have already lost about one-third of their value since the company brought on Albermarle, its direct investor.

Technological change can also complicate things, something that played out in Canada’s energy sector. For decades, Americans relied on Canadian natural gas, but roughly 10 years ago advances in drilling technology allowed Americans to unlock shale gas that was trapped in rocks. In a flash, Canada’s major export market turned into its biggest competitor, and the global supply of gas also skyrocketed, weighing on prices.

For critical minerals, the fear is that current uses for the metals, such as in battery manufacturing, will evolve. EV battery makers still haven’t settled on which model is best suited for widespread production, which means no one knows how much nickel, cobalt, manganese or copper – the minerals most commonly used in batteries – will ultimately be needed.

Plus, many critical minerals, such as niobium and bismuth, are exotic metals to most investors. “People really don’t understand them,” says Ms. Dimitrov. And there’s very little research on their producers because the independent investment banks that used to cover them have withered.

To play it safe, especially in down markets, investors here stick to what they know. For many fund managers, that’s gold, silver, copper and maybe a flavour of the year, such as lithium. “The rest of the periodic table, to their mind, just doesn’t exist,” says Mr. Selby of Canada Nickel.

Of the mainstays, gold has the most of appeal right now because the price of bullion is still hovering around US$2,000 per ounce, higher than even the heydays of the commodity supercycle. It’s also a relatively simple metal. There is a limited array of deposits around the world, and the means of processing it haven’t changed in 25 years. Investors who know gold can still feel comfortable with it, which is why junior gold explorers are the most likely to get financing in Canada.

But what about critical minerals? Does Canada stand a chance in the global race to produce them?

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There’s still hope. Mining companies still want to operate here, and Canada is on par with Australia for new drilling activity, according to S&P Global Market Intelligence, ranking only slightly behind Latin America. BHP Group Ltd. just greenlit a massive expansion of its Jansen potash project in Saskatchewan, and while it arguably isn’t a critical mineral mine, CEO Mike Henry, a Canadian by birth who has lived in Australia for decades, told The Globe and Mail that Canada is still an attractive place for investment “because it’s got the resources and talent, but it also has, in relative terms, pretty stable policies.”

That’s at odds with many countries in Latin America, which revelled in mine construction 20 years ago, particularly for copper, but are facing backlashes today. “Latin America went crazy for mining in the early 2000s,” said Kevin Murphy, an analyst at S&P Global. “Now we’re seeing protests.” Governments in the region are also more unpredictable, as seen with the ongoing drama at First Quantum Minerals Ltd.’s Cobre Panama project.

What needs a rethink is how junior miners finance themselves. Public markets are a crapshoot, and selling royalty streams on future output, another established way for miners to raise cash, isn’t easy for exploration-stage critical minerals companies.

One fix is for end users of critical minerals, such as car manufacturers, to support miners in their early stages. That’s becoming more common, and earlier this year Ford Motor Co. signed a long-term agreement supply agreement with Nemaska Lithium, the Quebec producer that is being reborn after filing for creditor protection in 2019.

But what Canada really needs is more long-term, patient capital. China is happy to play the long game and scoop up projects that may or may not pay off in 20 years.

The most obvious sources of this capital are private equity funds, which have their hands in almost everything these days. But even they may not fit the bill. These funds tend to hold their investments for five to seven years – only one-third to one-half of a mine’s development – and they structure their investments in a very specific way using debt. Junior miners take years to produce the cash that could pay interest.

Instead, a more tailored form of private capital may be necessary. London’s Appian Capital Advisory LLP is a private investor run by former mining executives and bankers that manages US$3.6-billion in assets and buys stakes in mining projects. “If you invest in mining, you need a long-term perspective through a cycle,” say CEO Michael Scherb, adding that Appian’s investors have their money locked in for 10 to 12 years. At Appian, the goal isn’t to predict whether a commodity price will remain high in three years’ time, the way a hedge fund might, but rather to decipher which mining assets will thrive even when metals prices suffer.

If Canada can attract more capital like that, its miners will have a fighting chance. There are plenty of natural resources here, and many regions, such as Quebec, have incredibly cheap, green power from hydroelectricity. For all the hype around Australia, Blair Way is incredibly bullish on Canada. He just prays that the anti-extraction crowd comes to see that the energy transition can’t happen without the country’s critical minerals. “We are dependent on mining, whether we like it or not,” he says.