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After years of wrestling with weak commodityprices, battered balance sheets and inhospitableequity markets, a healthier mining industry is

once again finding wary investors more receptive to itsstories of growth and discovery.

The shift in sentiment was apparent last year, when 20Canadian mining issues – more than half the total initialpublic offerings for all industries – were floated on Cana-dian exchanges. Six came to market inthe final quarter alone. Even a handfulof junior players joined in the equityhunt after largely sitting on the side-lines for the previous five years.

About $830-million poured into Ca-nadian-based miners’ coffers, the high-est total in seven years.

This year promises more of the same,and for much the same reasons that sparked the revivalin the latter half of 2017 after a dismal 2016, says DeanBraunsteiner, PricewaterhouseCooper’s national IPOleader.

Mining companies have spent the past few yearsretrenching and getting their financial houses in betterorder, rather than spending on development and explo-ration. But now as prices strengthen, the industry is turn-ing its attention to filling depleted pipelines.

The quest for capital is being fuelled in part by a strong

recovery in base metals such as copper, zinc, cobaltand lithium. The sales pitch centres on demand forelectric vehicles, whose batteries are made with thelatter two metals, while research has shown that zinccould be used as a substitute.

“It certainly looks like there’s going to be a shortfallof those particular commodities,” Mr. Braunsteinersays. “Companies that have those properties areprimed to [raise more] equity to bring them into pro-duction – or do spinouts, if those assets are not core.”

Still, not even the optimists are predicting a returnto the halcyon days of 2010, whenskyrocketing commodity prices anda huge investor appetite for resourcestocks enabled mining companiesto rake in more than $1.3-billionfrom 52 initial public offerings inCanada.

But the grim years of belt-tighten-ing that followed actually turned

out to be a blessing in disguise. During the boom,resource stocks were so hot “that the industry and theinvestment banks didn’t have to be particularly crea-tive in terms of raising capital. The capital was comingto them,” says Rick Rule, chief executive of Sprott U.S.Holdings Inc. in San Diego.

The departure of investors who often had scantknowledge of resources forced the industry to look forcapital elsewhere, Mr. Rule says.

IPOS, E2 2

REVIVED MINING INDUSTRYATTRACTS ‘SMART MONEY’With 20 IPOs last year, the highest in seven years, equity capital is flowing again

BRIAN MILNER

EXCHANGE-TRADED FUNDS

Analysts give their top ETF picksin the resource sector E3

SATURDAY, MARCH 3, 2018 | GLOBEANDMAIL.COM

The recent market turmoil has knocked back the val-ue of most asset classes. But one group has held upsurprisingly well. After rising dramatically in 2017,

certain scarce metals, such as cobalt and lithium, contin-ue to be hot commodities. In fact, the price of cobalt hasset a new record high.

So what is driving this rally, can it contin-ue, and how can investors benefit?

The key factor driving these metals issurging demand for lithium-ion batteries.These power sources are the most popularkind of rechargeable batteries used in homeelectronics, as well as electric vehicles. Pro-duction and sales of these batteries havetaken off as global sales for these products surge.

As the name indicates, one of the key ingredients inlithium-ion batteries is lithium. The price of the silvery-white metal, sometimes called “white gold,” has spiked bynearly 500 per cent over the past five years, though it haspulled back in the first part of this year. Australia andSouth America are the main lithium producers.

But arguably the bigger story related to lithium batterydemand is cobalt. The mineral has been used for thou-sands of years to add blue colour in ceramics, glass andpottery, but now its main demand is as a crucial ingredientin rechargeable batteries in electric vehicles where itextends battery life.

The rising demand for cobalt has fuelled a dramatic in-crease in the metal’s price. Cobalt prices on the LondonMetals Exchange more than doubled in 2017, and rose to arecord high early this year.

The supply side of the price equation is also boostingcobalt’s price. Cobalt is mostly retrieved as a byproductfrom copper and nickel production. The price of thosemetals has been persistently falling, making production

at many locations uneconomic. As well, asignificant amount of the world’s reservesare located in the Democratic Republic ofCongo (DRC) and that country is also by farthe world’s leading cobalt producer. Butthere are serious concerns about childlabour, worker exploitation and environ-mental problems in DRC. Electric auto mak-er Tesla has pledged to source its cobalt

exclusively from North America.Canada is currently the world’s third-biggest producer

of cobalt, with output of 7,300 metric tonnes in 2016; Chi-na is the second-biggest producer of cobalt with an outputslightly larger than Canada’s; while the DRC producesroughly 65 per cent of global cobalt supplies estimated ataround 100,000 tonnes this year.

Canada’s cobalt comes mostly as a byproduct of largenickel and copper mining at locations such as the KiddMine in Timmins, Ont. (owned by Glencore PLC), the Sud-bury mines owned by Glencore and Vale S.A., and theRaglan mine in northern Quebec (Glencore).

COBALT, E2

SCARCE, EXPENSIVECOBALT ESSENTIALFOR ELECTRIC CARS

The key factor driving the priceof this precious metal is surgingdemand for lithium-ion batteries. As the world’s third-biggest producerof cobalt, Canada is benefiting

TERRY CAIN

There are a handfulof companies

positioned to benefitfrom the cobalt

trend.

Sherritt International’s metals facility in Fort Saskatchewan, 25 km northeast of Edmonton, treats imported feeds to produce high-purity nickel and cobalt products. JAMES HODGINS

The quest for capital isbeing fuelled in part by

a strong recovery inbase metals.

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E2 G THE GLOBE AND MAIL | SATURDAY, MARCH 3, 2018

Today, “there are diverse sources of funding in the industrythat I haven’t seen in my career, which goes back 40 years.”

Mining firms “would prefer dumb money to smart money.And the money that’s around now is smart money,” he says.“Which means that it is price- and performance-sensitive. It’san inconvenience. … But the truth is that the industryrequires and is getting adult supervision. So it’s a very goodthing.”

The public financing successes of 2017 included somequality projects and themes that captured the market’s at-tention. That was the good news.

The bad news? “Too much money probably went to so-called hot commodities” like cobalt and lithium, Mr. Rulesays. “Money is usually allocated best to commodities thatare out of, rather than in, favour,” he says, citing uranium andpotash as examples.

Nevertheless, 2018 is shaping up as a good year on the pub-lic financing front. “My own suspicion … is that sectors re-spond to positive surprises. The expectation that investorshave for the mining industry is so low that it would almost beimpossible for it to underperform. It will be a challenge to getunder the bar, rather than over it.”

But what if the markets face a prolonged stretch of volatil-ity marked by wide price swings and intense bouts of selling?

Mr. Rule, for one, thinks that’s exactly what could be instore, at least for a short period. But he notes that resourcestocks are well-positioned to weather such dangers. “Oneadvantage that commodities might have in particular overgeneral equities is that many commodities are still priced at adiscount to their cost of production.”

And if volatility persists or nervous global investors worryabout what dreadful things could happen to their U.S. dollarassets on President Donald Trump’s watch, there’s alwaysthat tried and true shelter in a financial storm – gold.

Major gold producers, operating with more disciplinedmanagement and stronger balance sheets than they havehad in years, don’t face any serious capital shortages. Juniorplayers are always in need of additional cash, but they likelywon’t be rushing to the market for a lot of new financing thisyear either, even if bullion prices continue to improve.

“While gold has lifted, it hasn’t lifted enough that it’sattracted mainstream investors,” says veteran gold analystJohn Ing, chief executive with Maison Placements CanadaInc. in Toronto. “They are still playing marijuana stocks, bit-coins and chasing other hot volatility groups.”

The TSX gold index is still stuck in neutral. “My sense isthat you have to get bullion above the $1,400 area in some bigmoves,” Mr. Ing says. “And then you’ll get the investor com-ing back.”

The junior miners aren’t waiting around for them toreturn. Instead, they have been turning to senior or mid-sizeproducers, streaming companies or other sources of capitalin exchange for minority equity stakes or royalty positions.

Interest is picking up, “so I think we’ll see more moneyraised by gold companies in 2018,” says Nolan Watson, chiefexecutive of Vancouver-based Sandstorm Gold Ltd., whichprovides financing to gold mining firms in exchange for roy-alties or the right to purchase a share of the production.

The broader industry trend is certainly headed in the rightdirection. Global spending on exploration climbed last yearfor the first time in five years. Canada remains the leadingdestination, accounting for US$1.1-billion, nearly 14 per centof the exploration pie, according to a report by SNL Metals &Mining.

“When you see activity like this, there is almost alwayspressure to IPO to raise capital and develop the assets,” saysPhil Hopwood, head of Deloitte’s global mining group. “Giv-en the recent bull run in commodities like zinc, nickel andcopper, as well as continuing favourable conditions for coal –not to mention the emerging ‘commodities of the future’[cobalt, lithium, graphite] – it is not surprising to see the in-creasing activity around IPOs.”

Special to The Globe and Mail

IPOs: Resource stockswell-positioned to weatherprolonged stretch of marketvolatility, wide price swings

FROM E1

‘I think we’ll see more money raised by gold companies in2018,’ says Nolan Watson, chief executive of Vancouver-basedSandstorm Gold Ltd.

Many investment professionalswho watch the sector closely seethe upward move for cobalt con-tinuing.

“Ordinarily, I would be cau-tioning about potential new sup-ply and that high prices won’tlast,” says Jon Hykawy, a long-time Bay Street analyst, currentlypresident of Stormcrow CapitalLtd. “But in this case, cobalt is ascarce material, is dependent onthe political stability of the DRC,and isn’t easy to substitute. It rep-resents a significant issue for thenext few years.”

There are a handful of com-panies positioned to benefit fromthe cobalt trend. Dr. Hykawy saysthat for many investors, buyingshares in Anglo-Swiss mining gi-ant Glencore (GLEN) is an easyway to invest in cobalt – thoughthe diversified miner isn’t a pureplay. Glencore has a major pres-ence in the DRC’s cobalt miningindustry and owns the country’stop-producing copper-cobaltmine, as well as a majority owner-ship in TSX-listed Katanga Min-ing Ltd. (KAT).

Some money-managers seeinvesting directly in Katanga,which operates in the DRC, as abetter way to benefit fromcobalt’s rise.

“Katanga is the one real cobaltdeal among a cluster of small

names in the Canadian market,”says Michael Smedley, executivevice-president and chief invest-ment officer at Morgan Meighen& Associates.

He notes the company is theonly one of the junior firms com-ing on the Canadian scene with acurrently operating mine produc-ing cobalt. He also highlights thesizable investment from Congo-lese sources, and Katanga’s expe-

rienced board and managementteam with deep experience in theregion.

Mr. Smedley also favours Sher-ritt International Corp. (S) as away to play cobalt. Unlike theupstart players, Sherritt has along history, with roots stretchingback about 90 years. It has oper-ating mines in Cuba and Mada-gascar, as well as a refinery in FortSaskatchewan, Alta. Today, itsproduction is roughly one-thirdeach of nickel, copper and cobalt,with 2016 cobalt production top-

ping 3,100 tonnes.Mr. Smedley notes that, as one

of the world’s Top 10 producers,Sherritt will benefit from anyfuture surge in cobalt pricing. Healso says that Sherritt is one of thefew nickel companies producingnickel of high enough grade that,when used in lithium-ion batter-ies, less cobalt is required.

This “substitution effect” maybe a storm cloud on the horizonfor cobalt. Mr. Smedley notes thatan ever-increasing price for ametal inevitably encourages de-velopment of other minerals andprocesses as a substitute. If theuse of high-grade nickel in batter-ies grows, the reduced demandfor cobalt may lead to a drop inthe metal’s price.

In addition to Sherritt andKatanga, there are other compan-ies with Canadian connectionslooking to make their mark in thecobalt world. They include FirstCobalt Corp. (FCC), which plansto revive activity in the CobaltCamp area in central Ontario, andCobalt 27 Capital Corp. (KBLT)which invests in physical cobaltas well as production streams.There are also reports Brazilianminer Vale is looking to raiseabout $500-million for the rightsto future cobalt production at itsVoisey’s Bay nickel mine in Labra-dor.


Cobalt: Cluster of firms have momentum

FROM E1

Cobalt briquettes produced at Sherritt’s Fort Saskatchewan plant. The hard, lustrous metal is used in theproduction of high-temperature and wear-resistant super alloys, rechargeable batteries. JAMES HODGINS

Cobalt is a scarce material, isdependent on the politicalstability of the Democratic

Republic of Congo, and isn’teasy to substitute.

JON HYKAWYPRESIDENT, STORMCROW CAPITAL

Cobalt and lithium aren’t theonly metals surging in price. Ear-ly this year the price of palladi-um broke through to its highestlevel ever. The move aboveUS$1,100 per ounce topped theprevious high set in 2001, whenRussia restricted exports of oneof the world’s rarest metals.

The surge in palladium can betraced to some fraudulent tech-nology devised by Europe’s topauto maker.

Palladium’s main use is in ca-talytic converters for vehicles.An estimated 80 per cent ofglobal palladium demand comesfrom this application. In 2015Volkswagen was caught using a

so-called “defeat device” tomake its diesel vehicles appearto meet emission standards.

Both diesel and gasoline pow-ered cars require palladium intheir catalytic converters. Butdiesels use significantly less.Since the Volkswagen scandal,sales of diesel-powered vehicleshave fallen. Increased marketshare for gasoline-powered vehi-cles has meant increaseddemand for the limited globalsupply of palladium.

Since hitting a record high, theprice of palladium has pulledback – and some market ob-servers see more softnessahead. The research team at

French investment firm Natixis ispositive on the future of palladi-um, but it believes there couldbe a correction in the tradingprice. One reason for that call isauto makers responding to thehigher price by finding ways touse less palladium, and to devel-op alternatives to the metal.

Palladium futures trade on theNew York Mercantile Exchange.There are a small number ofpublicly traded companies withsignificant exposure to palladi-um – the top Canadian produceris North American Palladium Ltd.(PDL).

TERRY CAIN

Palladium’s record-breaking high

PALLADIUM’S RECORD-BREAKING HIGH

| INVESTING IN MINING

GLOBE CONTENT STUDIO

SEAN STANLEIGHMANAGING EDITOR

ELIZABETH HOLLANDSENIOR EDITOR

Globe Content Studio manages earned, owned and paid content opportunites across allGlobe and Mail platforms and formats. Send queries to [email protected]

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Bullion/ETFs

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cash flows and a portfolio of top-tier assets. Discover why we believe we are

the premier option for investing in the precious metals space.

SATURDAY, MARCH 3, 2018 | THE GLOBE AND MAIL G E3

Resource stocks are a betterbet now that the world’smajor economies are grow-

ing in tandem for the first time ina decade.

Prices of base metals, such ascopper, nickel, and zinc, shouldbenefit from rising demand amida synchronized global recovery.Ditto for energy commodities,which include oil and natural gas.Metals such as lithium and alumi-num, meanwhile, have otherpotential catalysts that can helpboost their prices.

Resource-stock exchange-trad-ed funds [ETFs] are an easy wayto play the sector, although theydon’t give pure exposure to pricesas commodity ETFs do. EquityETFs, however, can be less volatileand may provide dividend in-come.

We asked three analysts fortheir top ETF picks in the sector.

ALEX BRYAN, ETF AND MUTUAL

FUND ANALYST AT MORNINGSTAR

INC., CHICAGO

The pick: SPDR S&P Global Nat-ural Resources ETF (GNR)

This equity fund is one of thebest natural resource ETFs to ownbecause it spreads the risk acrossthree sectors globally, says Mr.Bryan. The portfolio holds one-third agriculture, one-third ener-gy and one-third mining.

The ETF, which tracks 90 of thelargest natural-resource firmsglobally, owns names such as BHPBilliton Ltd., Exxon Mobile Corp.,and Glencore PLC.

The fund should benefit fromrising commodity prices, butthere is also “operational risk,” henoted.

For instance, some resourceplayers may not be able to holddown costs to compete against ri-vals, he said. And rising commod-ity prices may already be re-flected in a company’s stockprices because the market tendsto be forward looking, he added.The ETF’s 0.40-per-cent fee, how-ever, is reasonable, he said.

The pick: SPDR S&P Metals &Mining ETF (XME)

This ETF, which owns U.S.-list-ed metals and mining stocks, isbetter suited for making a shor-ter-term, tactical bet on the sec-tor, says Mr. Bryan.

The fund also uses a modified,equal-weighting method forstock holdings as opposed to

using market capitalization.“That is going to favour some ofthe smaller players in this space,”and help with diversification, headded.

Industrial metals are the maindriver, but there is also about 15per cent in coal miners, he said.Top names include Consol Ener-gy Inc., Century Aluminum Co.,and Freeport-McMorRan Inc.

The narrow focus means thatthe fund can be “extremely vola-tile.” The ETF’s 0.35-per-cent fee,he noted, is reasonable comparedwith other industry-focusedfunds.

DAVID KLETZ, ETF ANALYST AND

PORTFOLIO MANAGER,

FORSTRONG GLOBAL ASSET

MANAGEMENT INC., TORONTO

The pick: Global X Lithium &Battery Tech ETF (LIT)

This ETF, which invests in com-panies involved in lithium min-ing, refining and battery produc-tion, offers an “unorthodox, butcompelling resource equity expo-sure,” suggests Mr. Kletz. This di-versification is important, hesaid, because the lithium indus-try is really an oligopoly con-trolled by a few South Americanminers.

Because of lithium’s lightweight and high-energy density,its usage in batteries is expectedto be the driver for increaseddemand. Lithium’s exposure tothe growth potential for applica-tions such as electric cars and re-newable energy storage make theETF an attractive long-term play,he added.

A 40-per-cent weighting inthree miners plus political insta-bility in South America are risksto the ETF, he noted. The fund’s0.76-per-cent fee is comparablewith other niche ETF offerings, hesaid.

The pick: iShares MSCI GlobalMetals & Mining Producers ETF(PICK)

This ETF, which gives exposureto global miners, should performwell as growth around the worldappears to have gained a solidfooting, says Mr. Kletz. Becausethe fund tracks an index whichexcludes gold and silver miners, ithas a larger tilt toward industrialmetals.

The industry’s cyclical naturemakes this ETF an interesting,tactical play on a global recovery,but tightening financial condi-tions, including rising interestrates as inflation perks up, couldbe a “significant test to the sus-tainability of the current upturn,”he said.

Fluctuations in the stock pricesof BHP Billiton, Glencore PLC,and Rio Tinto PLC could have “anoutsized impact on perform-ance” because of their higherweightings in the ETF, he added.The ETF’s 0.39-per-cent fee iscompetitive with its closest peers,he said.

DENISE DAVIDS, ETF AND MUTUAL

FUND ANALYST AT INDUSTRIAL

ALLIANCE SECURITIES INC.,

TORONTO

The pick: Global X Copper Min-ers ETF (COPX)

This fund, which invests incompanies involved in miningcopper, is better suited as a tacti-cal play on a global recovery, saysMs. Davids.

“When the economy is grow-ing, manufacturing generallypicks up, as does spending onconstruction and infrastructure.This helps boost demand for cop-per, as it is a key input for these

industries.”Top holdings include Zijin

Mining Group Co. Ltd., TeckResources Ltd., and Freeport-McMoRan. The latter minerrecently reinstated its dividendthree years after suspending it,reflecting improved market con-ditions.

One risk to this ETF is China’splans to reduce debt levels, whichcould potentially “reduce infra-structure spending in China,” shesaid.

The fund’s 0.65-per-cent fee isroughly in line with ETFs focusingon niche areas of the market, sheadded.

The pick: iShares S&P/TSX Glob-al Base Metals ETF (XBM)

This Canadian-listed ETF,which focuses on base metal pro-ducers globally, should benefitfrom rising industrial productionand infrastructure spending, saysMs. Davids.

China’s targeted cut in alumi-num production as part of its sup-ply-side reforms policies couldhelp boost prices of this metal,she said.

Demand is also growing foraluminum to be used in vehiclesto increase fuel efficiencybecause of its lighter weight, sheadded.

Top holdings include TeckResources, Freeport-McMoRan,and BHP Billiton. The ETF’s 0.61-per-cent fee is on the higher sidefor a passive index offering, butthere are few offerings domesti-cally in this space, she noted.Risks to this ETF include slower-than-expected growth, andheightened volatility due to a nar-row mandate, she said.

“This ETF is a better as a tacti-cal play.”


Six mining ETFs to play global growthBase metals are morecyclical, but lithiumcan be a longer-terminvestment drivenby rising demand forbatteries in electric cars

SHIRLEY WON

An aerial view of brine pools at the SQM lithium mine in the Atacama desert of northern Chile. South America’s ‘lithium triangle,’ which overlaysChile, Argentina and Bolivia, holds more than half of the known global reserves of the mineral. Tesla Inc., the pioneer of the electric vehiclerevolution, is turning to Chile to secure the lithium it needs to power its batteries. IVAN ALVARADO/REUTERS

A Tesla Model S P85, a full-sized all-electric vehicle, charges at adealership in Toronto. MATTHEW SHERWOOD/THE GLOBE AND MAIL

INVESTING IN MINING |

IT MAY BE COLD IN THENORTHWEST TERRITORIES,but for Fortune Minerals Ltd., itsNICO project about 160 kilometresoutside Yellowknife is starting togenerate some heat.

The London, Ont.-based minedeveloper’s prized asset is a cobalt,gold, bismuth and copper project –with the emphasis on cobalt.

Who wants cobalt? Lots ofpeople, apparently. Already de-ployed in the batteries of billions ofsmartphones, demand is growingbecause of the ever-expanding useof cobalt in lithium ion batteries forelectric vehicles.

“There’s a transformative evolu-tion in auto manufacturing,” saysgeologist Robin Goad, Fortune’schief executive officer. “This trans-formation is happening becauseof better, more efficient batteries,which use cobalt,” he adds.

Fortune is in a good position– literally – because of its location inCanada. Most of the world’s cobaltnow comes from the DemocraticRepublic of the Congo, which asMr. Goad notes, has been scarredby war and political upheaval fordecades. Most of its refining, mean-while, is done in China.

Fortune’s NICO project, basedon a deposit at the NWT site dis-covered in 1996, is one of the fewpotential new primary sources ofcobalt outside of Congo or China.

“Responsible sourcing hasbecome an issue in cobalt mining,”Mr. Goad says.

Legislation in the United States andEurope insists on strict policies ensur-ing that certain minerals – tantalum,tin, gold and tungsten – come froman ethical source, not fromminingoperations that are found to financeviolent militia groups or employ childlabour, for example.

Amnesty International has calledfor cobalt to be added to the list of

minerals, though next steps are un-certain as the Trump administrationin the U.S. has sought to water downor eliminate mining regulations.

In addition, a group called theResponsible Business Alliance,which includes most of the majorelectronics manufacturers, stronglyencourages its members to ensuretheir supply chains use responsiblysourced minerals.

Mr. Goad notes that NICO isworking under a settled land claimwith the support of the Tlicho FirstNation government, as well as thefederal, territorial and Saskatchewangovernments.

It’s also important to note, hesays, that while most of the world’scobalt is mined as a byproduct ofcopper and nickel mining, NICO is pri-marily a cobalt project with gold and

bismuth production as byproducts.“When cobalt is a byproduct,

the primary metals dictate theproduction. The world needs newsources of supply that are not fromCongo or China and are indepen-dent of nickel and copper mining,”Mr. Goad says.

About 30 per cent of NICO’srevenue is expected to come fromthe 1.1 million ounces of gold inmineral reserves, the companyprojects. NICO also contains oneof the world’s largest deposits ofbismuth, with 12 per cent of globalreserves. Bismuth is an environ-mentally friendly metal that is usedin anti-corrosion coatings – and inPepto-Bismol.

NICO’s primary promise is cobalt,though. “The cobalt market hasgrown at a compounded annual rate

DEMAND FOR COBALTHOLDS PROSPECTSFOR FORTUNEMINERALSMetal used in batteries a big part of deposit at company’s NICO project in NWT

The demand for cobalt, used in lithium ion batteries, is increasing with thetransformation in auto manufacturing.

SPONSOR CONTENT ADVERTISING PRODUCED BY THE GLOBE CONTENT STUDIO. THE GLOBE’S EDITORIAL DEPARTMENT WAS NOT INVOLVED IN ITS CREATION.

of approximately 6 per cent over thelast 20 years,” Mr. Goad says.

In December, the capital marketsunit of Bank of Montreal predicted thatcobalt prices are likely to rise significant-ly in the next two years. It forecast thatcobalt will peak atmore than $40 (U.S.)a pound, up from recent levels in themid-$30’s, and BMOdoes not rule outthe possibility that cobalt prices coulddouble from current levels in 2019.

As recently as the 1990s, only 1 percent of cobalt was used in rechargeablebatteries, according to a report byMetalBulletin. That has already risen to 55per cent of world cobalt consumption,according to Hamburg-based researchcompany Statista.

According to the London-basedresearch firm CRU, global mine pro-duction of cobalt was 117,00 tonnesin 2016. Exane BNP Paribas forecastsa market of 239,831 tonnes by 2025;Fortune Minerals’ feasibility studyfour years ago projects its NWT minecould produce 1,615 tonnes of cobaltannually, with a new study boostingthat estimate to as much as 2,000tonnes a year.

More cobalt is going to beneeded because it’s expected thatby 2025, electric vehicles will makeup as much as 25 per cent of theworld’s car and truck sales, up fromabout 4 per cent today, accordingto research by Goldman Sachs.

There are already 25 batterymegafactories either announcedor under construction around theworld; Tesla’s facility in Nevadaalone requires 7,000 tonnes a yearof cobalt, Mr. Goad says.

Anothermanufacturer, Volkswagen,has announced that it will offer 80electric vehiclemodels by 2025, andChina is driving the adoption of electricfleets with heavy investment andincentives, as well as penalties for thosewho purchase and buy cars poweredby internal combustion engines insteadof battery power.

The cobalt market

has grown at

a compounded

annual rate of

approximately

6 per cent over the

last 20 years.

Robin Goad

Chief Executive Officer,Fortune Minerals Ltd.

TSX:FT|OTCQX:FTMDFInvestor Contact:

[email protected]


Most commodities tradeon basic supply-and-demand fundamentals.

Not gold. What moves the priceof the shiny metal is much morecomplex – perhaps now morethan ever.

In normal times, gold is con-sidered a safe haven in volatilemarkets and a hedge against in-flation: When stock markets tankor the economy grows too quick-ly, the price of bullion rises.

But the latest breakdown inthat relationship occurredrecently when the equity bench-mark Dow Jones Industrial Aver-age plunged by 8.5 per cent be-tween Jan. 26 and Feb. 5. Thestock selloff was attributed tofears that as the economystrengthened, the U.S. Federal Re-serve would aggressively raise in-terest rates to ward off inflation.

As stock markets plunged,gold didn’t rise as expected. It fell3.5 per cent over the same period.

“I think gold is its own littleworld,” says Todd Colvin, a goldanalyst and broker with Chicago-based Ambrosino Brothers.

To further muddy the waters,gold is traded in U.S. dollars. Theprospect of higher U.S. interestrates normally drives up bondyields and the U.S. dollar, but thegreenback has been falling in val-ue since November. In normaltimes, that U.S. dollar discountdrives gold prices up. Not thistime.

“When I look at gold, I look atit as a barometer for two things:the U.S. dollar/Fed [Federal Re-serve] and that global-macro [in-flation] hedge, and nothing istrading normally,” says Mr. Col-vin.

The price of gold has plungedfrom its all-time high of US$1,900in September of 2011, following aconcerted effort by central banksto slash interest rates in the wakeof the 2008 global financial melt-down. As low borrowing costshelped to fuel an equity bull mar-ket, bullion fell to US$1,030 byDecember of 2015.

From that bottom, the pros-pect of higher interest ratesresulting from strong economicgrowth in the era of U.S. Presi-dent Donald Trump lifted gold toUS$1,300 by early February of thisyear.

At the same time, gold hasbeen weighed down by theadvent of the cryptocurrency bit-coin, which is seen as a rival tobullion as a store of value and ahedge against inflation.

“The cryptocurrency fadseems to have added a new layer,as the new ‘digital gold’ stolesome of the ‘real gold’ thunder.But given the uncertainty andsecurity issues, it has a way to goin order to replace the old shiny

metal,” says Mr. Colvin.With all those factors at play

on gold, he says bullion is at, ornear, a bottom.

“With a lot of balls in the air –with cryptocurrencies and Fedmeetings and stocks coming off –there is some definite upside,” hesays.

He says gold’s future shouldbecome more clear with theappointment of Fed chair JeromePowell, who replaces Janet Yellenas the head of the U.S. centralbank.

“It’s one of those trades wherewe’re waiting to see what hap-pens when [Mr.] Powell steps in,we’re waiting to see what hap-pens when the Fed tightens, howmuch are they going to tightenthis year.”

Fawad Razaqzada, a technicalanalyst with Forex.com in Lon-don, says gold’s recent selloffdoesn’t add up.

“I’m a little bit surprised bygold’s sizable pullback recently,especially given the simulta-neous selloff in the stock mar-

kets,” he says. Regardless, he re-mains “moderately bullish, butbullish nonetheless” on gold.

Mr. Razaqzada considers thefloundering U.S. dollar the prima-ry driver that has lifted goldprices by nearly 6 per cent sinceDecember, even when the morerecent selloff is factored in.

As a technical analyst, Mr.Razaqzada charts past marketmovements to determine futuretrends. Those trends are deter-mined when prices fall below es-tablished support levels or riseabove resistance levels.

In other words, he expectsgold to head “decisively higher” ifit breaks above a US$1,350 level ofresistance. However, if gold fallsbelow the key US$1,300 supportlevel, he says it’s “game over forthe bulls.”

“I am bullish at the moment.However, I’ll be very quick tochange my view should some keysupport levels break down,” hesays.


‘Gold is its own little world’Should investors go forgold in 2018? Is bullionat, or near, a bottom?Will cryptocurrenciesdull its shine? Theanswers are complex

DALE JACKSON

Gold is poured into moulds for bars in Cajamarca, Peru. As stock markets plunged recently, gold did not rise asexpected. It experienced a sizable pullback. RUTH FREMSON/THE NEW YORK TIMES

ETF EXPOSURE TO GOLD

Investors looking for exposureto gold through Canadian listedexchange-traded funds (ETFs)have a few options.

The iShares S&P/TSX GlobalGold Index ETF (XGD) tracks theperformance of the S&P/TSXGlobal Gold Index. The index iscomprised of 50 precious metalsstocks based on their marketcapitalization. Managementexpense ratio (MER): 0.61 percent.

The iShares S&P/TSXCapped Materials Index Fund(XMA) tracks the S&P/TSXCapped Materials Index. The rel-ative weight of any single hold-ing is capped at 25 per cent.MER: 0.61 per cent.

The BMO Junior Gold IndexETF (ZJG) tracks the perform-ance of 30 junior gold stocksthat make up the Dow JonesNorth America Select JuniorGold Index based on their mar-ket capitalization. MER: 0.34 percent.

The BMO Equal WeightGlobal Gold Index ETF (ZGD)tracks the S&P/TSX EqualWeight Global Gold Index. Itinvests in and holds global goldcompanies in the same propor-tion as they are reflected in theindex. MER: 0.62 per cent.

The Horizons Enhanced In-come Gold Producers ETF (HEP)tracks the performance of 15equally-weighted senior globalgold and silver producers. MER:0.82 per cent.

The Horizons BetaPro S&P/TSX Global Gold Bull Plus (HGU)is a leveraged ETF that seeks tocorrespond to two times the dai-ly performance of the S&P/TSXGlobal Gold Index. MER: 1.5 percent.

DALE JACKSON


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For investors scratching theirheads about the future ofvolatile world markets this

year, David Whittle offers an al-ternative: Say it with diamonds.

“We’re the largest new dia-mond mine in the Northwest Ter-ritories,” says Mr. Whittle, interimpresident and CEO of MountainProvince Diamonds Inc. (MPVD).

His Toronto-based company isa 49-per-cent joint venture part-ner with mining giant De BeersCanada Inc. in the mine calledGahcho Kué, a remote fly-in/flyout operation 280 kilometresnorthwest of Yellowknife.

“De Beers is the operator. Theyrun it hands-on, and we’re fullyinvolved with the oversight andmanagement. We take a fulsomerole in the decision-making,” Mr.Whittle says.

The mine started pre-commer-cial production in 2016 and wentinto commercial production inthe middle of last year.

“We’ve been at what’s calledfull-rate production since lastMay,” Mr. Whittle says. “The dia-monds we produce are ‘split inkind.’ We take our 49 per cent andDeBeers takes its 51 per cent andwe go off and sell our diamondsseparately.”

The rough diamonds extract-ed and eventually sold by Moun-tain Province after processing are

used for jewellery, and marketedaround the world. China and oth-er parts of Asia are consideredimportant primary markets.

The most prized diamonds ex-tracted are known as “fancy” and“special” stones. “A fancy stone isone with colour in it, say yellow,pink or red. A special stone issimply one that is 10.8 carats orbigger. It has nothing to do withappearance. It can be the biggestugliest stone, but if it’s that size,it’s special,” Mr. Whittle says.

Industrial diamonds, used fordrill tips and precision machin-ery, are increasingly supplied bysynthetic diamond manufactur-

ers, he adds.In December, Mountain Prov-

ince completed its 10th diamondsale, selling 364 carats at US$53per carat for proceeds of US$19.1-million in the sale. The price percarat was down – in the secondquarter of 2017 it reached US$91.

But the company said in astatement that this partly reflectsthat in the production split withDe Beers for the 10th sale, DeBeers won the bid for the fancyand special diamonds in thatround.

Des Kilalea, mining analystwith Canaccord Genuity in Lon-don, explains that while the fan-

cy and special diamond markethas its obstacles, and the indus-try sometimes has structuralchallenges, the widespread desirefor diamond jewellery remainsenduring, perhaps even timeless.

There has also been a persis-tent myth that diamond priceswill go up forever, Mr. Kilaleaadds. But this is mitigated by thefact that even though mines likeGahcho Kué are productive, thesupply of newly mined diamondsis about to go down.

“From about 2019, diamondproduction will start falling.That’s certain,” he says.

Richard Hatch, analyst with

RBC Capital Markets in London,agrees. In a presentation lastyear, he noted that explorationfor new diamond sources isfocused on regions (includingCanada) where previous orebodies have been found.

This doesn’t necessarily meanthat the diamond mining sectorwill face a completely smoothride, Mr. Kilalea adds. Diamondproducers face a number of chal-lenges, including difficulty get-ting credit for those in the mid-stream who cut and polish thediamonds, resource nationalismin some producing countries, taxchanges and cyclical slowdownsamong consumers.

Mr. Whittle says the sectortook a hit, for example, when In-dia imposed capital controls onits currency in 2013. “A lot of cut-ting and polishing is done in In-dia, and that disrupted the indus-try,” he says. Similarly, the dia-mond market tends to wobblewhen Chinese consumerdemand goes down from time totime.

But the outlook is good rightnow, even if stock markets areshaky. And Mr. Whittle notes thata proven supply of diamondsfrom a conflict-free zone likeCanada will make it more valu-able if supplies do reduce. As theEconomist noted recently, des-pite the stock dip, the world is inan unusual situation where econ-omies in virtually all regions aregrowing, albeit at differentspeeds.

“There’s a fair amount of dis-posable income in the systemright now,” Mr. Whittle says.Which is often an opportunity tobuy someone a diamond.


The bright side of the diamond supply gapIf global suppliesof newly mined rocksgo down, conflict-freeCanadian productionmay be more valuable

DAVID ISRAELSON

Gahcho Kué mine is operated jointly by Mountain Province Diamonds and De Beers in the Northwest Territories,280 km northwest of Yellowknife. The mine went into commercial production last year. TERRY KRUGER

Seconds count when schedul-ing fleets of trucks to haulwaste rock and coal from a

mine site.That’s why engineer Cory Tak-

enaka, superintendent of pro-cessing at a southeastern BritishColumbia coal mine of TeckResources Ltd., chose truck pro-ductivity as his assignment tocomplete a company-funded,mining-focused Executive Masterof Business Administration atSimon Fraser University’s BeedieSchool of Business in 2015.

His analysis of the amount oftime trucks were not moving ma-terials at Line Creek, followed bythe introduction of best operat-ing practices, led to a 15-per-centrise in fleet efficiency over 2014-15. “We measure efficiency in sec-onds, given the size of the fleets,”he says, estimating savings of“millions of dollars” throughreduced idling time.

The customized mining EMBA

for high-potential employees atTeck, developed by Beedie for thecompany in 2010, is one exampleof mining industry efforts toattract a new generation of well-rounded leaders with technicalexpertise and political savvy tomanage unprecedented disrup-tion.

“Mining has become a very dif-ficult business and will continue[to be],” observes Andrew Swart,global mining consulting leaderfor Deloitte, which recentlyissued a report identifying “re-envisioning talent management”as one of 10 top sector trendsworldwide.

Given the pressure to embracedigital-driven automation, envi-ronmental stewardship and com-munity engagement, says Mr.Swart, “you have to do things dif-ferently and you need peoplewho think differently.”

“If mining companies want tosurvive and they want to becomesustainable they have to drive in-ternal renewal. That doesn’tmean getting rid of people; it

means reskilling people [and]equipping people with new skillsand attracting new talent.”

In a $56-billion sector definedby boom and bust, the challengeis not lost on industry leaders.

“There has been a significantgeneration gap that has devel-oped over the last couple of dec-ades,” says David Garofalo, presi-dent and chief executive of Gold-corp Inc., citing waves of layoffs inlean times. As a result, he says,“we have older employees whohave prolonged their career and ayounger generation that is justgetting into the mining sector butthe most productive group in themiddle age, where you have thebest balance of age and experi-ence, is largely absent.”

His company, for example, of-fers in-house training that in-cludes a three-year “graduate de-velopment program” for youngemployees to develop technical,communication and leadershipskills.

Elsewhere, companies tap aca-demic programs tailored for the

sector. In 2012, York University’sSchulich School of Business intro-duced a mining specialty in itstwo-year Master of Business Ad-ministration, featuring finance,environmental sustainability andother industry topics.

“The mining industry has beenspectacularly successful in basi-cally turning off a whole genera-tion of people from mining as itgoes through this inevitable cycli-cal nature of its business,” saysRichard Ross, a former chairmanand chief executive officer andfounding director of the Schulichspecialty.

Over the past six years, Schul-ich has graduated 81 studentswho have landed industry posi-tions in finance, business devel-opment, sustainability and con-sulting. Sophisticated leaders canhave bottom-line impact, he says.“You can’t make decisions in iso-lation anymore; it doesn’t work,”he says.

A demand for well-roundedleaders was the genesis for Bee-die’s customized EMBA, which

grew out of a relationship withTeck dating back 20 years. After around of corporate downsizing,the company recognized “biggaps emerging,” recalls Mark Sel-man, director of Beedie’s com-munity and corporate programs.

Of particular concern to Teckwas that engineers lacked busi-ness and other training to suc-ceed in senior positions.

Today, more than 300 Teckemployees have completed agraduate diploma in business ed-ucation.

For Mr. Takenaka, for whomthe next step at the companywould be to become a generalmanager, his truck productivityassignment not only yielded costsavings from reduced idling timebut generated environmentalbenefits from reduced diesel fuelconsumption and emissions.

“We were making it a safeworking environment while wewere pushing through that extrasecond [of efficiency],” he says.


Miners go back to (business) schoolJENNIFER LEWINGTON


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Change can be a hard sell inthe mining sector.

Just ask Fred Davidson.“Nothing is dramatic, it’s all in-cremental,” says the chief execu-tive of Energold Group Corp., a35-year veteran of the industrywho has worked in 18 countries.

Case in point is Energold’smobile drilling rig, which allowsminers to reach inaccessible sitesusing small helicopters, pickuptrucks or even mules to get theequipment on site.

The technology lessens theenvironmental impact com-pared with more traditionalprospecting methods thatrequire building a road to thedrill site, or dragging big rigsacross the terrain. Reducing thecollateral damage of exploratorydrilling can have its advantages,Mr. Davidson says, given that itcan take 10,000 prospects tobuild one mine.

Mr. Davidson says the indus-try didn’t initially warm to hisinnovation, even though Ener-gold has grown from six drillingrigs in 2006 to 270 in 24 coun-tries. The mobile rigs now drilldown 1,000 metres and are fairlysimple, so that a percentage oflocals can be hired to operatethem.

“It’s taken us eight years to getit accepted by the industry thatthese things are highly effective,because the average geologistlooks at them and they look likea bit of a biplane compared to ajet plane,” he says.

“It’s a very small industry andit’s somewhat limited, especiallyin the last four or five years, bythe lack of drilling out there,” hesays. “Everybody’s been underthe crunch financially, so it’sbeen stalled to a degree.”

That inertia in the drillingworld has also carried over to theindustry’s approach to innova-tion.

Greg Baiden, chief executiveofficer of Penguin AutomatedSystems Inc. in Sudbury and aformer professor of robotics andmine automation at LaurentianUniversity, says many small com-panies that produce break-through technology are swal-lowed up by bigger corporationslong before they get a chance togo public.

He points to Optech Inc., ofConcord, Ont., which producescamera survey instruments formapping. It was bought by theU.S. conglomerate TeledyneTechnologies International Corp.

“Teledyne is a big construc-tion company,” Mr. Baiden says.“They go around buying up allthe little companies and none ofthe little companies end up onthe stock market.”

Mr. Baiden intends to raise in-terest in Penguin’s new robotsystem at the Prospectors andDevelopers Association of Cana-da’s International Convention.Braveheart uses computing andsensing networks in conjunctionwith artificial intelligence todetermine mineral locations. Buthe has doubts about his success.

“Every single mining investorwe’ve heard says we want toinvest in the mine, we don’t careabout the technology.”

Mininginnovationa hard sell

PAUL ATTFIELD

Ageological engineer by trade, RandySmallwood is spending most of histime these days explaining to poten-

tial investors why Wheaton Precious Met-als Corp. stock is such a good buy.

Wheaton is a pure precious metals playwith predictable costs, exploration upsideand a diverse asset base, Mr. Smallwoodpoints out. Wheaton pays a dividend, it isleveraged to gold and silver prices and – ohyes – it’s cheap, or as the company says, ithas a “compelling valuation.”

Mr. Smallwood is president and chief ex-ecutive officer of Wheaton, a Vancouver-based silver and gold streaming companyformerly known as Silver Wheaton thatwas spun out of Goldcorp Inc. in 2008.

Persuasive as his argument may be, it’sbeen a tough sell because investors hateuncertainty. Simply put, Wheaton Pre-cious Metals’s stock has been beaten downrelative to its peers because of its disputewith the Canada Revenue Agency overstreaming income from mines in othercountries.

The CRA takes the position that incomeearned by Wheaton’s foreign subsidiariesfrom mines located outside Canada shouldbe taxable in Canada. Wheaton argues thatincome earned by its foreign subsidiariesfrom mines outside Canada should not besubject to Canadian tax. The dispute is indiscovery, and a trial date is expected to beset in the next couple of months before theTax Court of Canada.

The market seems to be favouring Cana-da’s other two big streaming companies,the storied Franco-Nevada Corp., foundedby Seymour Schulich and Pierre Lassondein 1983, and Royal Gold Inc.

In its investor presentation, Wheatonlooks at three valuation measures: price tonet asset value, price to earnings and priceto operating cash flow. It takes the multi-ples Franco-Nevada and Royal Gold enjoyand applies them to its own market capi-talization to come up with an implied val-ue. Based on an average of the three mea-sures, Mr. Smallwood figures his companyshould be worth US$5-billion more than itis. Wheaton’s market capitalization isUS$9.7-billion. Wheaton reports its finan-cial results in U.S. dollars.

Let’s take a step back and look at whatthese companies do and why they areappealing. Royalty and streaming com-panies provide much-needed financing tomining companies, especially in early stag-es and when metal prices are down andmoney is hard to get. This type of financingdoes not dilute the equity of existing share-holders or weigh down the miners’ balancesheets with debt. While Franco-Nevadaoriginally was a royalty company, stream-ing has emerged as the model of choice.

“We’re all streaming companies now,”Mr. Smallwood says. He describes stream-ing as a contractual relationship betweentwo partners to work together for the bet-terment of the project. Rather than a royal-ty cheque, streamers get gold and silver,which they sell. Put another way, thestreamer makes an upfront payment to themine operating company, and in returngets a fixed percentage of the future silveror gold production from a mine at a prede-termined price.

Historically, mine operators have notbeen known to enrich their shareholders.Streaming companies, for the most part,have.

In a research report titled Streamers, theLow-risk Gold Investment, Joe Turner, ananalyst at Pring Turner Investment Man-agement, lays out the case for streamersplainly. Streamers offer a conservative way

to invest in precious metals for five power-ful reasons, Mr. Turner writes.

They are not subject to operationalrisks that miners face such as rising costs,or labour or equipment problems. Theysimply share in the revenue of the mine.

The largest streaming companies haveseasoned management teams who havethe experience needed to choose thestrongest partners and best projects.

Streaming agreements are attached tothe land or the metals, not the operator. Soif the operator changes or goes bankrupt,the agreement still stands.

“Optionality” or upside potential. Amine may start out small but through fur-ther exploration can become a bonanzafor the streamer as payments increase overtime.

Broad diversification because thecompanies have royalties or streams overdozens or even hundreds of projects in dif-ferent countries.

Wheaton’s troubles date back to 2012,when the CRA launched an audit of itsbooks. At the time, Wheaton was trading ata premium to Royal and Franco-Nevada.“The marketplace took it badly,” Mr. Small-wood recalls. “We gradually lost value andwe’ve been battling it ever since.”

So far, the CRA is seeking taxes, interestand penalties of $353.4-million for 2005 to2010, a number that could rise substantial-ly if it takes the same approach to subse-quent tax years. Years 2011 through to 2013would add another $310-million. Altogeth-er, Mr. Smallwood says, Wheaton could befacing a bill of $1.4-billion to the end of 2017if the CRA prevails. How the case isresolved has “broad implications, not justfor the streaming companies but for other

mining companies, and perhaps any com-pany with international operations,” Mr.Smallwood says.

Is the beating the stock has sufferedoverdone? Is Wheaton Precious Metals abuy?

Analysts seem to think so. Of eight ana-lysts surveyed at press time, five have astrong buy rating on Wheaton stock andthree a moderate buy, according to theGlobe Investor website. The information isprovided by Zacks Investment Research.By comparison, seven analyst ratings forFranco Nevada show one strong buy, onemoderate buy, four holds and one strongsell.

In a recent research report, analyst TonyLesiak of Canaccord Genuity affirmed his“buy” rating on Wheaton stock. The in-crease was partly because of a restructuredstreaming deal on the San Dimas mine inMexico and partly because the CRA dis-pute could be resolved before too long.

“We no longer believe it is suitable toassume the worst-case scenario [for Whea-ton] in our valuation,” Mr. Lesiak writes inthe report. His damage estimate includesthe discounted cash flow effect of futuretaxation on the company’s foreign income.

In the end, it may be the allure of goldand silver that will draw people to preciousmetal streaming companies and holdthem there. Big tax cuts in the UnitedStates bode ill for the U.S. dollar, Mr. Small-wood says.

“In an environment where the U.S. cur-rency is weakening, people will look tohard assets like gold and silver as a store ofvalue.”


Streaming model hits a bumpStreamers offer a conservativeway to invest in metals likegold and silver. The presidentof Wheaton Precious Metalssays stock in his firm is a goodbuy – despite a tax dispute

DIANNE MALEY

Vale’s Salobo copper mine, the largest copper deposit ever discovered in Brazil. WheatonPrecious Metals Corp. is a major partner in the mine and receives 75 per cent of the goldproduced from it. SALVIANO MACHADO/VALE


Under Seymour Schulich and Pierre Las-sonde, Franco-Nevada Corp. first appliedthe oil and gas royalty model to gold min-ers in 1983. It was hugely profitable. Up tothe time Franco-Nevada merged withNewmont Mining Corp. in 2002, it hadreturned gains of more than 30 per cent ayear to shareholders year in and year out.That’s because it started out small andgrew to become one of the leading royal-ty companies in the world.

In 2007, Newmont decided to spin Fran-co-Nevada off again in a public offering.Market cap continued to grow. Now thatit’s so much larger, can managementhope to match the historic returns of whatit calls the “Old Franco?”

“When we went public again in 2007,we didn’t know if we could match any-thing like that,” Paul Brink, senior vice-

president, business development at Fran-co-Nevada, said. The performance so farhas been impressive. “We’re just past our10th anniversary and our compound aver-age return has been 20 per cent a year.”

In its new iteration, Franco-Nevada hasexpanded into oil and gas and, to a lesserdegree, base metal streaming. Still, 90 percent of its revenue is tied to precious met-al prices, Mr. Brink says.

He’s not troubled by a sell rating onFranco-Nevada’s stock. “Franco hasalways traded at a good valuation,” Mr.Brink says. “We have some analysts whotake the view that you should sell thebest-valued stock in the sector and buythe cheapest one. So far, that strategyhasn’t worked out.”

DIANNE MALEY

Spirit of ‘Old Franco’ lives on

SPIRIT OF ‘OLD FRANCO’ LIVES ON

TO SAY THATDYNACORGOLDMINES INC. IS FORGINGAHEADdespite a difficult year is no exaggera-tion. The company’s gold operationsin Peru have withstood the demandsof starting up a new operation duringsome of the biggest challengesMother Nature could muster, and stillmanaged to remain consistent to 26straight quarters of profit.

It forecasts sales of well over$100-million (U.S.) in 2018, in theface of epic forces. Jean Martineau,Dynacor’s chief executive officerand president says, “in the pastyear, we have been tweakingour brand new modernized oreprocessing plant – and proved ourmettle by managing the new plantthrough an El Nino weather eventin March that caused severe, un-precedented destruction to roadsand bridges.”

According to Dale Nejmeldeen,Dynacor’s director of investorrelations, the company is seeingsignificant cash flow, with the oper-ational improvements coming fromthe new plant.

“In the third quarter of last year,we reported cash flow from opera-tions of just over 8 cents per share– and we were only operating at 78per cent of full capacity,” he says.

Despite these setbacks,Montreal-headquartered Dynacormanaged to reach full production inPeru last November or mid-fourth-quarter, Mr. Martineau says.

“We are in the company’shistoric best TPD start to a newyear as we have a mill that hasbeen running at full capacitysince November, “ he notes. “Lastyear, our production was almost80,000 ounces of gold.”

While Dynacor hasn’t yetpublished its production target forthis year, Mr. Martineau is quiteconfident that it will surpass last

year’s production.One of the reasons Dynacor has

been able to withstand the goldstock market’s ups and downs, heexplains, is because as a steadyand profitable producer, it gearsattraction not just to speculators inthe market, but to investors lookingfor a proven and safe path to playthe gold mining sector.

The company has also plannedahead by developing new facilities,as the older ones reached capacitya few years ago.

At the end of 2016, Dynacoropened a new mill in Peru, whichcan process 300 tonnes of ore a day.

Last year’s extraordinary El Ninoevent hampered production, so thenew mill couldn’t reach its capacityin 2017. However, Dynacor expectsit to run at historically high levelsthis year.

The new mill has been designedto handle increasing amounts ofore, up to 600 tonnes a day – dou-ble today’s capacity.

“This year we’ll have more pro-

WITHNEWMILL STARTUP BEHIND IT,DYNACOR FORGES AHEADGold company reaches full production, plans further exploration in Peru

SPONSOR CONTENT ADVERTISING PRODUCED BY THE GLOBE CONTENT STUDIO. THE GLOBE’S EDITORIAL DEPARTMENT WAS NOT INVOLVED IN ITS CREATION.

This year we’ll havemore productionthan last year,

with lower costs.Jean Martineau

Chief Executive Officer,Dyanacor Gold Mines

duction than last year, with lowercosts,” says Mr. Martineau.

In early 2018, Dynacor expectsto be connected to Peru’s nationalelectricity grid, which means betteroperations, lower costs and higherearnings, says Mr. Nejmeldeen.Using its current diesel-generatedpower, Dynacor pays about 27cents per kilowatt hour; an upcom-ing grid connection will lower thisto 7 or 8 cents per KW/h, a 70 percent savings, he adds.

“By operating at full capacity thisyear, we’re also going to start tosee the cost savings effects stem-ming from economies of scale.”

Dynacor reached a significantmilestone at the end of 2017, Mr.Martineau says.

“The company paid off its debtof $7-million it borrowed from a$10-million (U.S.) long-term creditfacility – more than a year beforeits due date of January 2019. Nowthat its debt has been paid, thecompany intends to establish itspolicy for paying dividends, follow-ing the instructions of its board.”

In addition, Dynacor will bedrilling its flagship gold project,called Tumipampa, 500 kilometressoutheast of Lima.

Although Dynacor operatedreasonably well in the face ofadversity last year, the company’sstock price did not reflect that,declining nearly 20 per cent fromthe previous year, when the stockgained more than 31 per cent, saysMr. Nejmeldeen.

“With full production expectedafter a trying 2017, this year shouldbe much more rewarding for ourshareholders,” he adds. “As we’llbe comparing our 2018 results tolast year’s growing pains and be-cause of all the fiscal improvementswe’ve made, we’re expecting tosee much stronger earnings.”

Last year’s El Nino, together with growing pains from startup, proved a worthy test for Dynacor Gold Mines Inc.


First, some perspective.

There are thousands of Ca-nadian mining companies

and thousands of Canadian-affili-ated exploration projects in dif-ferent stages of developmentaround the globe. In Canadaalone, there are roughly 150 to200 mines in operation.

Then there is MiningWatchCanada, which provided thenumbers above. It is a watchdogorganization in Canada devotedto covering these thousands ofCanadian mining interests do-mestically and worldwide.

It has a staff of five.So, for investors trying to

weigh the ethical, environmentaland social risks and potentialcontroversies surrounding cer-tain mines, “it’s a real challenge.Even for groups like ours, even forthe government for that matter,to really keep track of that manyplayers, it’s a constant challenge,”said Ugo Lapointe, Canadian pro-gram co-ordinator at Mining-Watch Canada in Ottawa.

This limited oversight meansthat the biggest mining contro-versies get the most attention, asone would expect. What pushescontroversies into becomingmajor ones – and a major disin-centive for ethically mindedinvestors – is when a situationgrabs headlines as a human-rights violation. This includes thehuman right to a clean andhealthy environment.

“When I do work across Cana-da, I will respond to calls comingfrom municipalities, from First

Nations that are affected by someof these controversial projects.These are the projects that we areworking on [as the industrywatchdog],” Mr. Lapointe noted.

Mining projects that don’treceive strong public complaintscan easily get ignored, “whichdoesn’t mean there’s no problemwith them,” Mr. Lapointe said. Itsimply means that complaintsaren’t loud enough and haven’treached the level of a watchdoglike MiningWatch, which openedits office in 1999 and receives themajority of its funding through adiverse group of foundations.

This adds an extra layer of risk.For instance, a mining operationmay receive environmentalapproval, but “that doesn’t meanthat they get the social licence,”Mr. Lapointe said. Social issues,from pollution to Indigenousland claims, can still arise, andmay be just a Twitter storm away.

“In the case of First Nations, wethink not only of proper consult-ation, but we are talking about

consent,” he said. It’s the need forclearer consent from communi-ties for projects on their tradi-tional lands, whether it’s ontreaty lands or claim lands.

In trying to circumvent suchrisks, there is a movement towardshareholders (typically institu-tional investors and professionalmoney managers with sufficientclout, who have the ear of miningexecutives) to foster more of a di-alogue with mining companies.Instead of simply screening min-ing stocks from environmentallyand ethically conscious invest-ment funds (that is, the nicheknown in the industry as sociallyresponsible investing, or SRI), theidea is to engage companies tochange certain risky policies.

“I think things are shifting,”said Dana Sasarean, lead mininganalyst in Toronto at Sustainalyt-ics, a firm which analyzes sustain-ability and other ethical risks ofcompanies. “[There’s] socialmedia and the fact that there areso many better ways for com-

munities to share concerns and toblow the whistle.”

Chile’s ruling that Barrick GoldCorp. must shut the above-ground plans for its huge Pascua-Lama gold and silver mine in theAndes was prompted by stronglocal opposition (although Bar-rick has been exploring plans torestart the project as an under-ground mine). The project hasreceived criticism from localgroups concerned with the threatof pollution to water and glaciersin the high, arid terrain.

“The rhetoric of what theyneed to do on the ground toaddress that is changing. Thereare new ways of engaging withthe communities, listening to thecommunities. Not going it alone,”Ms. Sasarean said. “I see compan-ies trying to learn from othercompanies.”

The creation by the federalgovernment of the new watchdogoffice for human-rights abusescaused by Canadian companiesoperating abroad is seen by some

as helping to create a frameworkfor regulators and companies foraddressing controversies. A coali-tion of human-rights organiza-tions (known as the CanadianNetwork of Corporate Account-ability of which Mining Watch is amember), has been working foryears to see the creation of thisnew independent watchdog(called the Canadian Ombud-sperson for Responsible Enter-prise).

“But that’s not enough. That’sa non-judicial mechanism,” Cath-erine Coumans, a resource co-ordinator at MiningWatch said.“What we really need is regulato-ry change and policy change thatwill allow us to hold parent com-panies in Canada to account forwhat their subsidiaries overseasare doing.”

So where does this leave inves-tors? One option is to divest andto find alternatives, and a prece-dent might be found with fundsthat have racked up experiencescreening out energy stocks. Butthen there is the question aboutwhether to screen out all miningshares or just the shares of com-panies facing controversy? Andwhat about banking stocks, giventhe banks’ exposure to mining?

“That’s the big trick in thisbusiness. What’s your exposureto mining? What’s your exposureto oil? So, we’re going to focusmore on controversy in terms ofthe banks, in terms of whatthey’re doing in some of theseareas,” said Wayne Wachell, chiefexecutive and chief investmentofficer of Genus Capital Manage-ment in Vancouver, which spe-cializes in fossil-free investing. Hesees some of the same tactics forscreening out energy stocks asbeing applicable to controversialmining investments.

It also has similar challenges.“It definitely makes ESG investing[an investment focus on environ-mental, social and good gover-nance issues] in Canada very dif-ficult, going fossil-free as we are,”he said. “If you take out energy,and you also screen out miningstocks, you’re losing maybe athird of your universe.”

What do the mining watchdogs see?Holding Canadianmining firms and theiraffiliates abroad toaccount remains a toughtask – even for theprofessionals. Wheredoes that leaveindividual investors?

GUY DIXON

The Chilean government has ordered Barrick Gold Corp. to close all surface facilities at its Pascua-Lama projecthigh in the Andes mountains. The gold mine, which straddles the Chile-Argentina border, has been criticized forthreatening water supplies and glaciers. JORGE SAENZ/THE ASSOCIATED PRESS


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