Summer has arrived – at least for those of us in the Northern Hemisphere: the time of year when days are long and the supply of serious news is often short. During this silly season, when the politicians take their long summer breaks, news writers are often forced to footle around with the frivolous and bizarre. And so it was without any real surprise that I stumbled across an article from Gabe Friedman on The New Yorker’s Currency blog about Canada’s mining industry and its dabbling in the world of medical marijuana.
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Yes – you read that correctly: worried that changes in China’s economy will slow down its demand for Canada’s metals and minerals, a couple of dozen mining juniors are apparently turning their hands to growing cannabis in what must be among the most bizarre diversification strategies ever attempted. Jennifer Boyle, CEO of Satori Resources, a gold miner, explains the rationale behind it:
“As a publically traded company, we always need a story that’s good enough to raise money on,” Boyle told Friedman. “If you latch onto something you can probably raise money on, i.e. medical marijuana, then why not? Because otherwise, your assets are in danger of being bought for next to nothing.”
And therein lies the problem for the juniors: the serious issue behind the not so serious headline. After a lengthy bear market, junior mining company valuations are at rock bottom. According to PwC’s annual “Junior Mine Report 2013”, between June 2011 and June 2013, the market capilatisation of the top 100 mining companies on the TSX Venture Exchange dropped from US$ 20.6 billion to US$ 6.5 billion. This has made it very difficult for them to raise money – an activity vital for the survival of a junior mining company. “We [went] through a period where there [was] a lot of excess capital floating around,” said Mark Brennan, president and CEO of Largo Resources, in the PwC report: “Now that’s dried up.”
As in Canada, so also in Australia. Last October, Rick Rule, chairman at Sprott Global Resource Investments, called most of the 800 or so junior miners listed on the Australian Securities Exchange “worthless”, while EY listed access to capital as the top business risk facing the mining and metals markets in 2013 – 2014.
Which is how we got to pot: “The reason you’re seeing the junior mining companies going to medical marijuana is because there is no money in mining,” Greg Downey, chief financial officer at Papuan Precious Metals Corp, told The New Yorker. “We look to where the money is going.” And following the decision by Health Canada to scrap personal permits for keeping marijuana plants for medical use in favour of commercial growing permits, the money – or at least some of it – is in weed.
Is this desperation? Perhaps. But if growing cannabis can help a junior survive this long weakness in the market and reach the recovery when it inevitably comes, this oddest of diversifications may become something of a stroke of business genius.