Some resource investors are outright bullish on 2018.
Stan Bharti, founder of resource-focused merchant bank Forbes & Manhattan Inc., feels that way. "I think we're peaking in the general market and hard assets will come back," he said, describing himself as "very bullish" on 2018.
In part, he looks to the general market awash in relatively easy money given a low interest rate environment. "There's so much cheap money around," he said. When, or if, it flows to commodities, "watch out," Bharti said.
Among those S&P Global Market Intelligence recently interviewed asking for crystal ball predictions on the junior and mining markets in 2018, Bharti is one of the more exuberant. But he is hardly alone in holding an optimistic view.
Rick Rule, president and CEO of Sprott U.S. Holdings Inc., is somewhat reserved but sees 2018 as promising. "I think probably the surprises are to the upside," he said, adding as a caveat that, in his view, about 80% of juniors are "probably valueless" and it would be the "best of best" that may surprise in 2018.
Rule sees potential for base metal juniors getting more recognition, so long as the price of copper holds up. He thinks that the market doubts that the rebound in copper is here to stay. "If we could see that US$3.25 [per pound of copper] was in place and US$3.50 [per pound of copper] was likely, I think you'd probably see a rerating of development-stage copper projects," Rule said.
While not outright bullish on copper, he described a market where supply disruption may drive or support the copper price on the back of low or misallocated investment in copper projects over the past decade, rather than buoyant demand in 2018.
The chief executive also expects gold to do reasonably well, pushed by worries about the general economy. That too could lift juniors, which focus mostly on the gold sector.
Mark Ferguson, associate director of Metals and Mining Research with S&P Global Market Intelligence, views the junior sector's prospects in 2018 in a similar light as Rule. It may build on a decent 2017 that saw exploration expenditures increase.
The appetite for financing juniors would be decent, although probably not astounding, Ferguson said.
"I don't think there's bandwidth for the junior sector to blow their budgets up significantly because of that," he said.
'Black swan' event?
Others expressed reticence about the market for juniors in 2018. Brent Cook of Exploration Insights pointed to booming U.S. stocks as a source of malaise with potential to correct and pull down the resource sector.
"It feels pretty damn toppy to me," he said. "We're due for a correction and maybe a big one." This was an issue others such as Rule raised as a caveat. That is, the junior market would be fine, barring a black swan event in the U.S.
In some ways, the junior market perplexes Cook, a veteran resource stock picker. He pointed to a few exploration stocks that skyrocketed in 2017, such as Novo Resources Corp., New Nadina Explorations Ltd. and Garibaldi Resources Corp. They did so on relatively scant exploration data, and their share prices pulled back after more detailed exploration results cast doubt on high expectations.
"That tells you something," Cook said, lumping the share price moves in with broader interest by speculators in booming assets such as art, stocks and real estate as well as cryptocurrencies. Meanwhile, he said, thorough exploration results did not get as much attention, relatively speaking.
Cook, while not outright pessimistic, was skeptical that the year would be great for juniors. "The flow of funds is not into this sector. I don't think it's going to be a good year for financing."
Matthew Lennox-King, president and CEO of junior Contact Gold Corp., expects 2018 to be constructive, building on a 2017 market he described as apathetic. One difference between the two years may be funding by majors, with Lennox-King wondering if it will dry up. Major and intermediate companies took numerous toeholds in juniors in the past couple of years, but Lennox-King wonders if the industry's better projects have been backed.
He expects that funding in 2018 will require going to higher net worth individuals, in the U.S. in particular, rather than relying on strategic investments from majors. But some see it differently.
Cook believes that the appetite of majors could remain relatively strong in 2018. "I suspect this year we're going to see more companies putting money into juniors."
Major restocking
In this — the hunger of major miners to fill thinning project pipelines — medium-term views converge. Lennox-King, Cook and others S&P Global Market Intelligence spoke with agreed that majors face increasing pressure to replace reserves. Discoveries of large, high-quality assets are rare.
Meanwhile, in the past half-decade or so, larger miners have hunkered down amid a bear market to focus on in-house assets and improve margins to, in some cases, pay back debt shouldered during the last bull market in commodities.
Cook suspects that majors are already starting to do something about it, pointing to the toeholds in recent years. They are hungry, in his view. "If there is a legitimate discovery, it's going to be worth a lot."
Rule pointed to strong valuations made in modest-sized acquisitions in 2017, noting purchases by Eldorado Gold Corp. and Sandstorm Gold Ltd. of gold assets in Canada and Turkey, respectively.
That trend — a strong appetite for high-quality assets — will continue, Rule said. "I think what you're going to see ... is the industry will recognize that the chickens are coming home to roost as a consequence of 10 years of under-investment, mis-investment and mal-investment," he said. "And there will be increasing, and much more strategic, M&A in the sector."
Still, the question remains as to when, or possibly if, the majors will return to the market in a bigger way to bolster pipelines, in part given slim pickings. "They're not doing the big deals, so far," Ferguson said.
Kevin Murphy, a senior research analyst at S&P Global Market Intelligence, indicated that majors simply cannot do huge deals as in the past. For one, they may still hold debt from past acquisitions. And further, investors may not have forgotten the pain from some of the excesses incurred during the last boom, which could remain a drag on M&A.
Still, resource investors such as Rule, Bharti and Cook are looking for opportunities. Cook hopes to make as many as five exploration-focused picks in 2018, and Rule said Sprott is ready to deploy cash amid a competitive market.
"Absolutely," Rule said. "We have lots of money available ourselves and also from our partners."
Rule noted that competition is especially strong for Canadian and U.S. assets. In emerging markets and frontier areas, there is "extraordinary" competition from China, and in the latter case, Sprott prefers to partner than compete. Elsewhere, Rule is targeting Australian equities under A$100 million.
More broadly, Rule considers miners as 2018 underdogs ready to pounce. "Because the expectations are so low, I suspect it will be difficult to get under the bar rather than over the bar."
