Cannabis weeds out junior miners
A boom in cannabis investment is siphoning capital away from mining and hitting junior miners hardest, forcing them to up their game and potentially improving the quality of projects in a sector long rife with cowboy speculators.
A boom in cannabis investment is siphoning capital away from mining and hitting junior firms hardest, forcing them to up their game and potentially improving the quality of projects in a sector rife with cowboy speculators.
Canada’s relaxation of cannabis laws culminated in legalisation for recreational use in October 2018.
Other jurisdictions are following suit or liberalising their laws on medical or health use, creating an industry that has lured a breed of high-risk, highreturn investors.
The world’s top three listed cannabis companies — Canopy Growth, Tilray and Aurora Cannabis — have a combined market value of about $30bn and consumers are expected to spend more than $7bn on cannabis products in Canada alone in 2019, says Deloitte.
In Africa, cannabis companies are setting up projects in Lesotho, while other countries, including Zimbabwe and SA, plan to issue licences.
“Raising money is extremely difficult,” said Patrick Downey, head of Canadian junior gold exploration company Orezone Gold, who compared the cannabis boom to the headwinds juniors faced during the dotcom bubble of the late 1990s.
“It’s a cyclical business, and it will come back, but you have to have a good project.”
The rise of cannabis comes at a time when investors were already turning away from mining. “The biggest problem in mining is that it destroys shareholder value,” said Philip Hopwood, Deloitte’s global mining and metals leader.
Miners operating in Africa — already viewed by many investors as a particularly risky bet — have been doubly hit.
“It’s like the straw that broke the camel’s back,” said one explorer at the mining indaba in Cape Town.
“As early IPOs [initial public offerings], once a rite of passage for exploration juniors, have slowed to a trickle with cannabis stocks delivering better short-term returns, miners are increasingly turning to private equity.
“And as active investors replace passive stockholders, companies are having to sell the merits of their projects to more discerning potential backers.”
Sebastien de Montessus, CEO of Endeavour Mining, one of the most successful mid-tier gold players, considers it a process of natural selection.
“It’s a good thing … you’re going to have to be stronger and better,” he said at the indaba.
The CEO of Barrick Gold, one of the world’s biggest gold firms, said mining’s struggles to fend off the challenge from cannabis reflects the poor state of the industry in the eyes of prospective investors.
“We should be embarrassed that somebody is prepared to make a choice between those two options,” Mark Bristow said.
“Mining is just so fundamentally material to our everyday lives, whereas I can’t say the same of cannabis.”
Majors such as Barrick and companies with projects already in production can better weather the storm.
The newest juniors in the riskiest areas are racing to adapt. And some are getting creative.
Prospect Resources’s executive director Harry Greaves on Wednesday won an award at the indaba for his lithium project in Zimbabwe.
He is also considering growing cannabis at the lithium site on the outskirts of Harare. “We don’t yet have a marijuana licence, but we have the land available,” he said.
MINING IS JUST SO FUNDAMENTALLY MATERIAL TO OUR EVERYDAY LIVES, WHEREAS I CAN’T SAY THE SAME OF CANNABIS