Australia is often viewed as a highly prospective region for mining companies around the world; it is rich in natural resources and has a stable geopolitical scene. The country’s only downfall – it can prove to be costly.
That’s why many Australian mining companies are turning to North America to acquire established mining operations and explore new ones.
Mark O’Dea, the chairman and founder of Vancouver-based mining company-incubator Oxygen Capital, has experienced firsthand the transition from Australia to the likes of Canada, United States and Mexico.
Oxygen has incorporated nine companies to date and the recent selling of four companies for a collective $C2.9 billion ($3.2 billion), including Fronteer Gold for $C2.3 billion, exemplifies the desirability of the North America region.
Having graduated from Melbourne’s Monash University, O’Dea’s attention turned back to Canada, which, like a large portion of North America, offers highly prospective conditions for mining operations.
“Familiarity is a big reason why Australian companies are moving into North America, the geology between Canada and Australia in the gold world for example, are very similar,” he tells Australian Mining.
O’Dea points to the Greenstone Belts of Western Australia as being highly comparable to those in Canada, alongside the controls on mineralisation that occur across the regions.
“The similar geopolitical stability is another big factor, they’re both comfortable places to work,” he says.
O’Dea insists, however, the most crucial influence is the “value discrepancy” between Australia and North America.
“Australian companies are trading to huge premiums, so they leverage their currency value over Canadian sites,” he explains.
O’Dea was quick to point to Newcrest Mining’s $1.1 billion acquisition of the Red Chris copper-gold mine from Canadian company Imperial Metals in March this year as a prime example.
The purchase of a 70 per cent stake in the mine marked the Australian giant’s first entry into the North American mining market.
One of the contributing factors at the time of the deal being the mine’s geological similarities with the company’s Cadia site in New South Wales.
“There are many cultural similarities between Australia and North America, which makes it easier for Australian companies to operate there,” Newcrest head of investor relations Christopher Maitland says.
With this in mind, Newcrest will “continue to explore in Australia, as well as in North America (as) both are highly prospective regions for gold explorations,” Maitland says.
St Barbara is another Australian company targeting growth in North America following its $768 million takeover of Canada’s Atlantic Gold.
The Melbourne-based gold producer became part of the increasing trend of mining companies capitalising on the comparatively lower cost of Canadian operations.
Atlantic, a TSX-listed company that owns and operates the Moose River operations in Nova Scotia, which comprises one producing open pit, the Touquoy gold mine and three others that are in development, including Beaver Dam, Fifteen Mile Stream and Cochrane Hill.
The company declared commercial production at Moose River in March 2018, producing 91,000 ounces at Touquoy during the year at an all-in sustaining cost of $761 an ounce.
Atlantic had planned to expand production at Moose River to over 200,000 ounces as the other three pits were developed.
St Barbara chief executive officer Bob Vassie believes the acquisition allows the company to diversify its portfolio at a low cost and high value operation.
“It is a sustainable long-life operation of scale with a low AISC position which generates impressive margins, the asset also has significant growth potential which St Barbara identifies as an exciting opportunity,” Vassie says.
The move was symbolic of the larger industry trend, which has also been reciprocated by Northern Star Resources, which acquired the Pogo underground gold mine in Alaska last year for $356 million.
The move was the company’s first big step off the shores of Australia and has already been paying dividends.
Northern Star reported in April that it was confident of achieving record gold production in the fourth quarter of this financial year.
Capitalising on the thriving gold price, Northern Star’s 185,296 ounces of gold sales in the March quarter of this year was driven by production at Pogo.
Such strong progress has the company (at the time of writing) set for record production in the June quarter of 235,000-260,000 ounces at an all-in sustaining cost of $1075-1175 an ounce.
A clear advantage that Australian companies have over those in North America and Canada, in particular, is the sentiment of investors, which includes the government.
O’Dea points to valuation discrepancy between Australia resource stocks and Canadian resources stocks, driven by the emergence of the cannabis trade.
“We (Canada) have been victimised by the cannabis trade, all of venture capital and high-risk money that used to find its way into the mining space has migrated out, mainly to cannabis,” he says.
“The valuation of Canadian mining companies has been decimated because of the cannabis trade that hasn’t affected the Australian universe.”
Indeed, the Canadian Government has decreased its investment in the resources sector significantly, leaving many in the mining industry perplexed, particularly O’Dea.
“There’s been almost no investment in the mining sector, it’s a bit of an enigma,” he says.
“Why aren’t Canada more supportive of the resources sector? It’s the backbone and bread and butter of why Canada is how it is today, the government swings with the political winds.”
O’Dea’s frustration seems to be justified given the significant growth in investment towards the cannabis industry within the last few years.
International business advisory firm BDO revealed that investments in Canadian marijuana companies increased from $C43 million ($46.8 million) in the first half of 2016 to a whopping $C770 million in the same period of 2017.
The biggest effect has been on junior mining companies in Canada, with BDO reporting that the number of new listings on the TSX of mining companies has decreased by 20.3 per cent from 2018 to 2017.
Perhaps the most indicative evidence of the decline in investor sentiment for mining is the volume of shares traded on the TSX-V.
In 2017, 27.7 billion shares were traded on the exchange compared to 6.2 billion life science shares, these numbers significantly shifted in favour of life sciences the following year.
In 2018, mining shares traded dropped to 22.4 billion and life sciences increased to 10.8 billion, according to the BDO report, again highlighting the shift in investor sentiment.
O’Dea, having experienced both sides of the coin, offers a particularly strong piece of advice for Australian investors who are looking at local companies moving to North America.
“If you’re an investor with a longer game in sight, now is the time to invest,” he says.
“Like any type of bubble, it’s going to burst, and reality is going to set in as soon as the cannabis trade starts to wane.”
This article also appears in the August edition of Australian Mining.