Black Swan Risks and Valuation Gaps: The Struggles of Single-Asset Miners

Wildfires have burned over 45 million acres of land across Canada in 2023 (as of November 2), shattering the previous record of over 18 million acres in 1989. Fires especially impacted the Yukon, Quebec, and British Colombia while reduced air quality extended across Canada and the United States.

Figure 1: Mentions of “Wildfire” Over the Last 10 Years in Materials for TSX-Listed Companies

Source: FactSet

As large swaths of the planet are affected by extreme weather events such as floods and droughts to storms and wildfires—with increasing severity and frequency—the consequences and risks issuers face need to be accounted for and priced in accordingly. While companies in most industries can relocate operations to jurisdictions with lower nature-related risk, mines are uniquely beholden to operate where the mineral deposit is found and accept the risks of natural geography that come with it.

With respect to the impacts of this extraordinary Canadian wildfire season, multiple mining companies (both operating and in exploration) had to provide market updates on the impacts to their exploration and operating activities, which in some cases led to the suspension of operations.

While wildfires are one example of extenuating risks facing both society and mining companies, they are only one of the many risks that increasingly threaten the regular operation of mines.

In this article we highlight:

• Examples of improbable, but highly impactful, “black swan” risks that have cropped up for metals and mining companies this year.

• The valuation impact seen between companies whose operations and risk profile are diversified across multiple operations versus those operating with concentrated risk with a single operation.

The Swan Flocks of 2023

Black swan risks are improbable but impactful events with significant implications for a company’s operations, reputation, and bottom-line. Such events are unpredictable, rare, and extreme. In the case of the metals and mining industry, these could range from natural disasters such as the record Canadian wildfire season to political instability, changes in regulations, or supply chain disruptions. The impacts are further magnified among companies that lack diversity in their operating footprints.

Wildfire, Droughts, Floods: A Shifting Climate

Nature-related risks have showed up in a variety of scenarios in 2023, and while not uncommon in the oft-remote locales that mines operate within, the reality of a shifting climate poses an increasing threat to regular operations. Looking to the impact on valuation, we highlight the case of Victoria Gold Corp. (VGCX-CA) in Table 1 with its timeline of operational updates as the mine required employee evacuations due to wildfires in the Yukon.

Despite operations being altered for a two-week period, the mine’s annualized gold production remained in line with guidance it had set at the beginning of the year. Nevertheless, valuations decreased, as shown in Figure 2.

Table 1: Timeline of Operational Status Updates from Victoria Gold Corp. (VGCX-CA)

Source: Company Reports

Figure 2: The Impact of Wildfire-Related Operational Shutdowns for Victoria Gold Corp. (VGCX-CA)

Source: FactSet

Victoria Gold is not alone in facing the implications of a shifting climate, including more extreme weather events. In Table 2, we highlight a non-exhaustive list of issuers that reported, either via news releases or earnings reports, the impact of climate events. Increasingly, investors exposed to the metals and mining space will need to have a strong understanding of the operational footprints and climate risks associated with the locales where issuers operate.

Table 2: An Illustrative Selection of Climate/Weather Events Impacting Mining Issuers in 2023

Source: FactSet, Company Reports (*Market Cap as of November 24, 2023)

Blockades and Union Negotiations: Shifting Stakeholder Demands

Mining issuers also face social black swan risks where they operate. Labor groups have been incentivized to renegotiate contracts within the context of an inflationary environment and, in some cases, we’ve seen union members setting up blockades to hinder operations as they seek concessions. Additionally, where there are disagreements in the awarding or renewing of mining concessions and permits, blockades have been erected as a form of social protest.

We highlight as examples the recently resolved labor strike at Newmont Corp.’s (NEM-US) Peñasquito mine in Mexico. It lasted over four months and led to a complete suspension of operations from early June to mid-October. Similarly, workers at Fortuna Silver’s (FVI-CA) San Jose, Mexico, mine set up a blockade for just over a week in early May to seek higher profit-sharing distributions. Blockades aren’t also limited to land-based stoppages, as we highlight a recent blockade of small boats at a port used by the Cobre Panama mine, owned by First Quantum Minerals Ltd. (FM-CA), as part of protests against a new mining contract that was signed.

New Legislation and Policies: Shifting Geopolitical Realities

Mining and exploration companies also face macro black swan risks because of the shifting politics where they operate. As Figure 3 shows, mine production occurs around the world. While some jurisdictions have storied mining histories and strong legislative precedent, for many mining is a nascent industry with potential for swings in legislative support and loyalty depending on the party in power. Particularly in times when inflationary pressures can disproportionately impact developing jurisdictions, mine operators may experience economic headwinds.

Figure 3: Producing Mining Properties (Available in the FactSet Workstation)

Source: FactSet, Prospector

We refer again to the ongoing protests against the newly negotiated and enacted mine contract between First Quantum Minerals Ltd. (FM-CA) and the Panamanian government regarding their Cobre Panama mine, as one example. Currently facing constitutionality challenges at the Supreme Court, the contract has now become part of larger political discussions as the citizens of Panama will head to the polls in May 2024. But even jurisdictions with an extensive history in mining are seeing shifts in legislation, such as Mexico passing new mining reforms that became effective in May 2023.

Situations such as these highlight the necessity for investors in the sector to maintain a strong understanding of not only the technical and social risks, but also the geopolitical state of affairs in the countries in which issuers operate.

Impact of Concentration Risk on Valuations

The relative impact of the aforementioned black swan risks is acutely felt among the issuers dependent on a single producing asset as their sole source of revenue. Even a single event can create long-term discounts to valuations, agnostic to the commodity pricing that typically is one of the main drivers of issuer pricing.

At a sector level, we note this confluence of risk (specific to mining) is reflected in a discount to net asset value (NAV) applied across mine operators. In Figure 4, we plot consensus price to NAV against market cap to highlight that only ~18% of mine operators (both single and multi-mine) are trading at a premium (>1.0x P/NAV) to their NAV value.

Figure 4: Scatter Plot of Consensus P/NAV against Market Cap for Single and Multiple Producing Mine Companies (Single Producing Mines n=30, Multiple Producing Mines n=70)

Source: FactSet 

Looking at the valuation discrepancies between single- and multiple-mine operators, we analyzed the same subset of 100 issuers with mines in production (across multiple commodities) and where FactSet estimates coverage provides a consensus NAVPS. Only 30 of them have a single producing mine.

In Figure 5, we see that issuers that have diversified their operating asset risk across multiple mines see a slight premium across their quartile ranges—a 0.18x premium to the mean of single-mine issuers.

Compared to the boxplots from a year prior (Figure 6), both single-mine and multiple-mine valuations are spread within a similar range but with higher mean valuations. While the spread of multiple-mine issuer valuations shows some tightening up since the year prior, with fewer outliers, the premium to the mean Consensus P/NAV value persists against their single-mine peers. This highlights the consistent value placed on diversification of risk via multiple operating footprints. It also provides a case for increased consolidation in the sector (with fewer single-asset operators) to mitigate the impact of these increasingly frequent risk events.

Figure 5: Boxplot Comparison of the Distribution of Consensus P/NAV Valuations for Both Single and Multiple Producing Mine Operators (Present Consensus P/NAV)

Source: FactSet 

Figure 6: Boxplot Comparison of the Distribution of Consensus P/NAV Valuations for Both Single and Multiple Producing Mine Operators (-1Y Consensus P/NAV)

Source: FactSet 

Conclusion

The mining industry faces unique challenges due to the fixed nature of its assets, leaving it exposed to more black swan risks from evolving regional climates, communities, and geopolitics.

Although a single black swan event may not lead to adverse circumstances, over time the cumulation of impacts could require issuers to maintain higher capital levels to mitigate their impacts. In addition, single-asset miners are more susceptible to lasting valuation discounts versus operators with diversified operating footprints. Which makes the case for further consolidation in the sector, to improve issuer valuations and hedge against a riskier future.

For investors, it’s becoming paramount to understand and price in these risks. Doing so could help them limit exposure to bigger and more sudden losses further in the future.

This Insight (as well as the Databook supporting the figures presented here) can be found in the FactSet Workstation under the contributor “FactSet Deep Sector Insights.”

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.