Where are the juniors?

We tend not to notice things that don’t happen. This week’s ‘Off the radar’ is about something that is strange in how it is not happening: exploration and junior mining initial public offerings (IPOs). Where are they?

A couple years ago, we had a flood of property listings on the JSE that signalled the top of that market. In the same way, one would expect that roaring commodity prices and all-time-highs for mining stocks would trigger a range of new mining listings. One would assume that, but one would be wrong.

After a nearly decade-long hiatus during which commodity prices cooled, mining companies scrambled to degear and the world shifted its focus to Big Tech and Bitcoin, commodities and mining stocks are back in the news and hitting all-time highs nearly across the board.

How long will this last? Well, a key element in calling the top of this cycle is missing: booming exploration spending.

Read: Africa’s pandemic-hit mining sector faces exploration challenge

Normally, booming commodities attract exploration activities as new untapped mineral resources are sought out.

These ventures are encapsulated by risky resource exploration miners listing and junior miners popping up left, right and centre. Typically, these pools of speculative risk capital derisk new (and abandoned/brownfields) resources (or go bankrupt trying to) that are bought up and taken into production by larger, better-capitalised majors once their potential is clear.

These new sources of supply then flood the market and – surprise, surprise – commodity prices start to fall as supply outstrips demand. The key word here is: normally.

Read: Big profits in commodities boom

Below is a topographical view of the JSE-listed mining stocks and their relative sizes. Because the sizes of BHP Group plc, Anglo American plc and Glencore plc obscure the other players, I have also created the topographical views excluding these global majors.

Source: Refinitiv and Integral Asset Management workings

Source: Refinitiv and Integral Asset Management workings

Source: Refinitiv and Integral Asset Management workings

Source: Refinitiv and Integral Asset Management workings

What is quite clear from the above are three observations:

1. The three global majors truly do dominate the rest the local mining sector;
2. Even excluding these global majors, the major platinum group metal (PGM) miners dominate the rest (a uniquely South African phenomenon as the majority of global PGMs exist in our country); and
3. There are few junior miners (I’d say fewer than 20) and almost not a single exploration stock on the JSE (maybe Orion Minerals but not really any others). Indeed, the few juniors that are listed have been listed for years, thus their existence cannot truly be attributed to the current commodity boom.

So where are all the juniors and exploration mining plays?

While hardly representative of global exploration spending, Master Drilling Group’s slim rig and exploration rig revenues across the last five years does tell the simple tale of collapsing exploration spending.

If you dig through the disclosures of exploration spending by BHP Billiton, Anglo American and others you will see a similar trend.

Source: Master Drilling (various reports)

That said, there are early indications – from various management teams as well anecdotal sources – that exploration spending is starting to pick up. Slowly.

The wheels turn slowly

Despite this, it will take years for even a successful mineral find to be derisked enough to list, to arrive at a bankable feasibility study, and eventually move into production (or get taken out by a major).

Adding to this headwind, regulatory burdens are higher now than they were a decade ago. Various other global and domestic risks are probably higher too. And environmental, social and governance (ESG) pressures now also exist for miners …

All these factors discourage investors from pouring capital into (new) mining investments. This is especially true domestically, but arguably across Africa and large parts of the non- developed market geographies out there too.

Thus, the unfortunate answer about where all the exploration and junior miners have gone is quite simple: this time round, most of them simply do not exist. Yet.

In the absence of large new mineral supplies coming to market, and assuming demand remains robust, the current commodity cycle could have a way to go.

A key part of this cycle starting to crescendo would be these exploration and junior miners popping up everywhere. Thus I am flagging this as a peak cycle indicator for investors when they start to pop up on the JSE and other exchanges.

For now, though, exploration plays and junior miners are few and far between.

Read: Namibia scraps black ownership rules for mining exploration licences

Keith McLachlan is investment officer at Integral Asset Management.