State of Mineral Finance: 2015 Déjà Vu

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1 0 State of Mineral Finance: 2015 Déjà Vu Written by: Samad Uddin M.Sc. Director, Capital Markets, PDAC Published on:

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3 2 Executive Summary 2015 is expected to be another challenging year for the exploration industry has been a year of share consolidations, mergers and acquisitions, delistings from exchanges, weak share prices and low discovery rates. While the downturn may have bottomed out, the turnaround will likely not take place until The global economy is expected to grow by 3.8% in 2015, 4.0% in 2016 and 4.1% in Canadian growth is also expected to be positive - albeit at a slower pace and is forecasted to grow by 2.4%, 2.4%, and 2.2% respectively. As major economies continue to face uneven growth, metal prices are expected to face similar prospects driven by anaemic demand. Aluminum is the exception; a robust 17% price increase is expected in the next three years ( ) followed by nickel (up 7.1%), zinc (up 6.8%) and lead (up 5.5%). Copper prices are projected to remain at their current levels and uranium is projected to experience a 20% drop over the next three years. Total financing activity (including debt and equity) across all exchanges in the mining sector has dropped significantly, falling on average by 13.6% annually since 2007 (for a total decline of over 60% in that period). Majority of the decline was due to a drop in equity financing, which fell by 80% for the same period. The overall decline in 2014 was not as dramatic, dropping by 1% over 2013 levels, as financing activities start to stabilize. In terms of the number of deals, a total of 2,895 financings were announced globally (2,707 equity, 188 debt). This was a drop from the peak of 3,827 total financings announced in On the TSX and TSXV, the share of debt financing came in at 81% (TSX) and 47% (TSXV) respectively in As average prices continue to decline share prices for mining companies on the TSXV have declined by 83%, from 62 cents in 2007 to 11 cents in 2014 it is becoming too costly, restrictive and dilutive to issue equities. Debt issuance is rarely an attractive alternative for most juniors, as they do not typically have the revenues required. The largest financings took place during the second quarter of 2014 when a total of $9.7 billion was raised, $8.9 billion of which was from the TSX and $820 million from the TSXV. In the final quarter of 2014, a total of $5.3 billion was raised for the mining sector (from all Canadian exchanges). The Venture exchange did manage to improve financing in Q compared to Q4 2013, as financing increased by 14% to $778 million. Despite this improvement, Q4 s result was far lower than the peak reached in Q when a total of $3.2 billion was raised on the TSXV. The corresponding drop in financings for exploration by issuers listed on Canadian exchanges was far worse, falling off a cliff from $1.3 billion in Q to a low of $150M in Q4 of 2014 (an 88% drop). Looking at yearly totals, from 2007 to 2014 financing for exploration fell by 91%. As expected, during this downturn the number of M&A deals increased in 2014 both globally and in Canada. 62 deals were announced in Canada in 2014 compared to 158 globally. By value, global M&A activities have fallen since peaking at $64.5 billion in 2012 to $16.7 billion in The value of Canadian M&A activities has been steady at around $6 billion between 2012 and 2014.

4 3 Globally, exploration budgets dropped by 26% in 2014, reflecting weak commodity prices and the limited prospects for a robust recovery in demand. Canada and Australia continued to be the two top destinations for exploration, attracting $1.5 billion (13.9%) and $1.3 billion (11.7%) respectively. Grassroots exploration in Canada fell by 37% between 2013 and 2014, while spending on existing minesites increased 13.5% and spending on late stage & feasibility fell by 25.5%. Exploration companies increasingly relied on flow-through shares to raise risk capital, which will help many companies to hold onto their claims in Canada. The data in this report clearly reveals the important counter-cyclical role played by flow through during the recent downturn. As overall financing levels for exploration fell, the proportion of financings using flow-through shares went up. Flow-through accounted for 72% of all financing raised for exploration stage activities from , highlighting its importance as an incentive in attracting capital to the riskiest stage of the mining cycle. New exemptions along with a cooperative regulatory regime are major changes to the Canadian regulatory landscape that could have profound impact on the way junior issuers raise capital, expanding access to a wider pool of investors and potentially reducing the costs of raising capital.

5 4 Table of Contents Executive Summary 2 Table of Contents 4 Introduction 6 Sources of Information 6 Assumptions and Limitations 7 SECTION I: The Macroeconomic Environment 8 Uneven and Feeble Economic Growth 8 Weak Commodity Prices 9 SECTION II: Financing Trends 12 Downturn in Global Financing Trends 12 Canadian Financing Levels Bounce at the Bottom 15 Debt Issuance Increases while Equity Suffers 18 Sharp Drop in Canadian Listings 19 Share Prices Reach Bottom 20 Mergers and Acquisitions Increase 21 SECTION III: Exploration Trends 23 Global Exploration Budgets Hit Hard 23 Sharp Drop in Canadian Exploration Budgets 25 Capital Raised for Exploration Falls off a Cliff 26 Working Capital Turns to Survival Capital 27 SECTION IV: Fiscal Support and Capital Market Reform 29 Use of Flow-Through Shares Buffers the fall in Financings 29 Regulatory Developments in Canadian Capital Markets 31 New Exemptions Could Help 31 Cooperative Capital Market Regulator A Tool to Harmonize Regulations 33 Looking Ahead 35 ANNEX A: Supplementary Charts and Tables 36

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7 6 Introduction The Prospectors & Developers Association of Canada (PDAC) has always had a strong interest in the ability of prospectors and mineral exploration companies (juniors 1 ) to raise capital. In 2012, the PDAC Board of Directors established a capital crisis committee to more closely monitor the financing activities of publicly listed companies in order to better understand the financing difficulties being faced by the industry, leading to quarterly reports throughout 2013 and These reports were prepared by Michael Doggett of Beach Meadows Resources and can be found on the PDAC website. 2 This new report builds on these quarterly reports, and is broken down into five sections: 1) The macroeconomic environment 2) Financing trends 3) Exploration trends 4) Fiscal incentives and capital market reforms 5) Annex The global macroeconomic focus provides a backdrop of the environment under which the mining sector is operating in as the health of the macro economy dictates the demand for raw materials driven by industrial output. This section also includes commodity prices broken down by the major metals, as prices are a key factor that drives investment into companies specializing in those commodities. The financing trends and exploration trends are the core of the report. The financing trends section includes sections on capital raising via debt and equities, number of deals, Canada specific financings, M&As, market capitalization, trading volumes, listings etc. The exploration trends section includes an analysis of exploration budgets by region, stages of development and company type, as well as information on exploration financing. The fourth section provides information on fiscal incentive and regulatory reforms that have an impact on capital raising. Finally the report provides concluding remarks about the overall financing environment for juniors with an emphasis on future prospects. Sources of Information The report extracts data on mining finance from several standard industry recognized sources. The definitions used in the report are taken directly from the source and have not been altered by the 1 While there are many factors that, taken together, define a junior exploration company, a key defining feature is that it is neither a producing company nor the recipient of significant income from production or from some other business venture. See Natural Resources Canada definition here: 2 The report can be accessed from the link:

8 7 author. In order to make an unbiased assessment about the sector as a whole the data is not dissected or adjusted other than computing for exchange rates and indexing. Where such modifications are made, an explanation with appropriate reference is provided. The report is meant to be as consistent as possible and, where applicable, further improve the quality of the data and how it is presented. The data collected in the report is primarily sourced from the following: - TMX Group s MiG report - SNL Metals & Mining - World Bank s Commodity Markets Outlook - International Monetary Fund s World Economic Outlook - Gamah International s Monthly Report on Mining and Exploration Company Financings (MECO) Additional information is collected from various sources for which the reference is made in the appropriate text, tables and charts. Assumptions and Limitations The time period chosen in this report is meant to show recent trends, in particular, since the financial crisis. This report is not meant to provide a longer term view (prior to 2007) of the financing trends for the mineral sector or relationships to commodity price cycles. The purpose of the report is to inform PDAC members on the latest financing developments and to provide a backdrop for policy advocacy by the PDAC, on behalf of its members. The data used in the report is considered to be accurate as of February 18, Assumptions and estimates used to produce the data are from the sources; any modifications to the data are clearly outlined in the report. For a full description and explanation of the methodology used to produce this report, please contact the author, Samad Uddin, at suddin@pdac.ca.

9 8 SECTION I: The Macroeconomic Environment Uneven and Feeble Economic Growth Industrial output is a key factor in determining demand for mineral resources and financing activities. As economic growth picks up, so does industrial output, which has an impact on commodity prices and investment in the sector. The commodity growth cycles in the past had a positive correlation with global economic growth and therefore, keeping the pulse of the economic climate is an important determinant of future potential for mineral resource development and financing. Countries such as Canada and Australia that are natural resource endowed benefit as global economic growth picks up; particularly in countries that are major consumers and net importers of mineral resources. An important source of information on historical and forecasted economic growth is from the International Monetary Fund s (IMF) World Economic Outlook. The IMF in their most recent report 3 identified four key areas of development that could impact global economic growth. The first is the low crude oil price environment, which from a junior exploration company s perspective, is a positive development as it reduces operating expenses for remote exploration activities that depend on diesel generators. However, weak demand for raw materials from major economies, particularly from emerging economies, is another reason for driving both oil and metal prices lower. Additionally, countries that depend on investment in the oil and gas sectors lose out on capital spending on major projects as oil prices drop. For example, integrated oil producer Husky Energy Inc., has announced a cut to its capital spending by $2 billion for 2015, which will have a direct impact on economic growth in Western Canada. U.S. now being a major producer of oil will also suffer a similar fate when it comes to investment in the oil sector. The second factor is the uneven levels of growth in the major economies. U.S. growth has picked up; however, other major economies such as Japan are experiencing slowdowns in economic activity. Without a uniform level of growth amongst major industrialized countries, global growth will not be as robust as it could have been. The third issue is the appreciation of the U.S. dollar relative to other major currencies, which could help to offset the impact of lower commodity prices for resource countries (apart from the U.S.) as most commodities are priced in U.S. dollars. As the U.S. dollar appreciates, the commodity exporting countries can reduce their losses by benefiting from the stronger U.S. dollar to buffer their exposure to weak prices. The last factor that could impact economic growth is the increase in interest rates for many of the emerging economies that are also commodity exporters. Higher interest rates are not favorable for business as lending costs increase resulting in a slower economic growth environment than if interest rates were lower. The Chart 1a below provides global GDP forecast and Canada s growth forecasts. It is not surprising that Canadian growth is lower than global growth given the weak commodity sector, which is facing 3 IMF World Economic Outlook Update January 19, 2015

10 9 additional headwind from weaker oil prices. Despite becoming a more diversified economy by increasing the services sector, Canada is still resource sector dependent to drive broader economic growth. The Bank of Canada s Monetary Policy Report in January 2015 indicates a weaker growth figures for Canada than the IMF as the central bank feels that the substantial drop in oil prices will have a greater negative impact on Canadian GDP growth estimated growth is expected to be 2.1% in 2015, revised from 2.4% in the October 2014 report. The IMF s forecast for Canada is slightly higher for 2015 at 2.4% Chart 1a: GDP Growth Rate (Nominal) Canadian GDP World GDP Source: IMF IMF Forecasts Weak Commodity Prices Table 1a below shows metal prices since 2007 and the following Chart 1b shows both historical and forecast prices from 2015 to Most notable declines were in Uranium (69% drop), Nickel (52% drop), Zinc (32% drop) and Aluminum (28% drop) prices between 2007 and Iron ore, which is not included in the chart but included in the Annex Table 2, had the highest increase, almost doubling during the period (183%) followed by tin (55%). However, iron ore has continued its price decline since peaking in and now sits at $67 USD per Dry Metric Ton. All other metals on the index experienced lesser declines for the 2007 to 2014 period. Table 1a: Metal Price Index (2007=100) % Change 2007 to 2014 Metal Price Index % Copper % Aluminum % Iron Ore % Tin % Nickel %

11 10 Zinc % Lead % Uranium % Source: IMF and PDAC calculations The price forecast figures taken from the IMF does not indicate a robust recovery between 2015 to 2017, reflecting weak demand from slow economic growth. Of the seven commodities being tracked in the chart, six of the seven are below their 2007 price levels. Looking ahead, Uranium prices are expected to drop by 19.6% followed by iron ore, dropping 18.3% from 2014 to All other commodities being tracked in the charts will experience a recovery, albeit not robust Chart 1b: Commodity Price Index and Metal Price Index (2007=100) Forecast 160 Tin, Copper, 98.4 Metal Price Index, 91.6 Lead, 88.7 Aluminum, 84.1 Zinc, Note: Iron ore is excluded from this chart Nickel, 51.2 Uranium, 24.7 Source: IMF commodity forecasts and PDAC calculations In addition to pricing trends for commodities, the chart about shows the different pricing characteristics of each of the metals and illustrates the volatile nature of metal prices. Each metal observed in the index may have unique demand and supply factors but the 2009 drop does indicate a positive correlation between the various metals in the index. When there is a major downturn, it shows in all major commodities, including metals as was the case in 2009.

12 Price Index State of Mineral Finance We look at precious metals separately given that most junior mining companies tend to focus on precious metals. Gold prices have been falling since 2012 dropping by 29% to an average of $1,186 ($/oz) in Following a similar downward pattern but more dramatic, silver prices have fallen by 69% since 2012 to $ ($/oz). More recently, figures from February 2015 indicate a recovery in both precious metals, which should help divert financing activities towards companies focusing on gold and silver in Chart 1c: Gold and Silver Price Index (2007=100) Gold Silver Source: SNL and PDAC calculations

13 Billions State of Mineral Finance SECTION II: Financing Trends Downturn in Global Financing Trends Global equity financing activity in the mining sector has dropped by 20% annually since The decline in 2014 was not as significant, dropping by 10.5%, as financing activities start to plateau. From the peak of $74 billion in 2007, the 2014 level of $15 billion is an 80% drop as financing moves towards debt. If we include debt financing, which picked up in 2011 and 2012, total financing fell by 13.6% annually since 2007 (see chart 2b). Despite the increase in the share of debt financings, it was not sufficient to offset the declines in financings. $80 $74 Chart 2a: Global Mining Equity Financing $70 $60 $60 $50 $40 $30 $41 $33 $33 $20 $14 $17 $15 $10 $ Source: MECO, Gamah International Ltd. Chart 2b shows the clear dominance of debt financing, accounting for on average 65% of total financing. After peaking in 2009 at 53% from total, equity financing has dropped to 21% in Given the low interest rate environment, estimated to be about 2.3% for G7 countries in 2014, and the low share prices, it is not surprising that most companies are choosing to issue debt for financing. However, this is not necessarily the case for all sizes of companies. Junior exploration and development companies that do not have revenue streams to finance debt, are mostly limited to raising funds through issuing equities. In order to make this distinction, we can look at data from public companies listed on Canadian exchanges in the next section.

14 Billions State of Mineral Finance $250 Chart 2b: Global Mining Finance by Type $200 $150 $125 Debt Equity $100 $50 $- $53 $63 $47 $53 $75 $55 $56 $74 $60 $41 $33 $33 $14 $17 $ Source: MECO, Gamah International Ltd. Chart 2c below illustrates the number of financings at the global level. Although the amount of capital raised in dollar figures is much higher for debt financings, the number of financings is dominated by equity financings. Over 90% of financing is done using equity, while the remaining is debt. Also, on average the deal size for debt is much higher compared to equity financing. In 2014, a total of 2,895 financings were done where 2,707 was equity financings and 188 debt. This was a drop from the peak of 3,827 total financings in 2007 when 95% of offerings were equity. Equity financing tends to be more volatile than debt financings, which is stable over time. Many companies typically rollover debt from previous periods when interest rates are low, which could explain the stable nature of the number of debt financing. A fact in the industry that is not always apparent is that the majority of debt financings are undertaken by the mining companies with large market capitalization while equity financings are the dominant source of funding for juniors. This point is illustrated in the next section with the TSXV data. Despite the low interest rate environment, junior companies are not able to take advantage of low borrowing cost due to the lack of revenue stream to finance debt. Even during the credit boom, junior mining issuers are not in the same position as major mining companies who are able to structure credit facilities to take advantage of the low cost of debt financing vs the higher cost typically associated with equity-type financings.

15 Q1/2007 Q2/2007 Q3/2007 Q4/2007 Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 Q2/2009 Q3/2009 Q4/2009 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014 State of Mineral Finance ,500 4,000 3,651 Chart 2c: Global Number of Finance Deals 3,500 3,000 2,304 2,689 2,707 2,500 2,000 1,500 1,646 1,357 1,578 1,546 Equity Debt 1, Source: MECO, Gamah International Ltd. The quarterly data in table 2d below breaks down the data further and shows the volatile nature of equity financing. Even at the quarterly level, debt financing is more stable than equity financings. In 2012 Q4, a peak in equity financing activity was recorded when over one thousand equity deals were completed compared to averages of about 500 equity deals quarterly. Despite the drop in the value of financings, the number of financings has increased as average size financings drop, which is an indication of financing difficulties. 1,200 Chart 2d: Number of Finance Deals (Quarterly) 1, Equity Debt Source: MECO, Gamah International Ltd.

16 Billions State of Mineral Finance Canadian Financing Levels Bounce at the Bottom Canadian exchanges, TSX and TSXV in particular, are the main exchanges where majority of publicly listed mining companies in the world are listed. The Canadian Securities Exchange (CSE), formerly the Canadian National Stock Exchange, has also captured a small portion of the publicly listed junior companies (Note: the CSE data, although included in Chart 2e below, is not visible due to the relatively small size of financing, which totaled $39.2 million in 2014). By comparison, TSX financing was $21 billion in 2014 for mining companies. TSXV also accounted for a noticeable portion, at $3.5 billion in The line on the chart illustrates Canada s share of financing, which was at 33.6% in 2014, and increase from 26.4% in The size of the financing illustrates the unique characteristics of junior mining companies. The topheavy figures indicate that big financing deals concluded by large mining companies tend to dominate the value charts compared to higher number of small financings done by juniors. We can get a better picture of this characteristic in the next section where we look at the number of financings. $40 Chart 2e: Canadian Mining Finance 40% $35 $30 $25 $20 $15 $10 $5 $- 32.0% % 33.4% 30.8% % 26.4% % % $ $29 $23 $20 $20 $23 $21 $ TSX-V TSE CSE Canada's Share from Global Source: MECO, Gamah International Ltd. and the Canadian Securities Exchange 35% 30% 25% 20% 15% 10% 5% 0% On a quarterly basis, the largest financings took place during the second quarter of 2014 when a total of $9.7 billion was raised, $8.9 billion of which was from the TSX and $820 million from the TSXV (see Chart 2f below). In the final quarter of 2014 a total of $5.3 billion was raised from all Canadian exchange for the mining sector. The Venture exchange did manage to improve financing in Q compared to Q as financing increased by 14% to $778 million. Despite the improvement, Q4 s result in 2014 was far lower than the peak reached in Q when a total of $3.2 billion was raised on the TSXV.

17 Q1/2007 Q2/2007 Q3/2007 Q4/2007 Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 Q2/2009 Q3/2009 Q4/2009 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014 Billions State of Mineral Finance $16 Chart 2f: Canadian Mining Finance (quarterly) $14 $12 TSX-V TSE $10 $8 $6 $4 $2 $0 Source: MECO, Gamah International Ltd. The number of financing deals can be used to show the average financing size of junior issuers vs major issuers. The TSXV number of financing outweighs TSX by 5 to 1. This is particularly the case for equity issuance. The TSX had a total of 56 equity issuance in 2014 whereas the TSXV recorded 719 in the same year. If we calculate the average deal size, then the TSX deals average $170 million in 2014 and the TSXV $4.4 million. Table 2a: Number of Financings on Canadian Exchanges Exchange Year CSE TSX TSX-V Equity Debt Equity Debt Equity Debt , , , , Source: Gamah and PDAC calculations The Chart 2g below shows that the number of financing has steadily declined as junior issuers face capital raising challenges. There has not been an uptick on debt financing to substitute for the drop in equity financing. The chart also shows that the number of financing relative to the amount of capital raised is much higher for the venture issuers as majority of financing is small compared to the TSX.

18 Q1/2007 Q2/2007 Q3/2007 Q4/2007 Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 Q2/2009 Q3/2009 Q4/2009 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014 Millions Q1/2007 Q2/2007 Q3/2007 Q4/2007 Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 Q2/2009 Q3/2009 Q4/2009 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014 State of Mineral Finance Chart 2g: Number of Finance Deals Announced in Canada (Quarterly) TSE Equity TSE Debt TSX-V Equity TSX-V Debt Source: MECO, Gamah International Ltd. For average size of financing on the TSXV, the peak was reached in Q when average equity financing was $8.6 million and more recently was hovering between $2.3 and $2.7 million in 2014 (see Chart 2h below). A particular challenge for junior issuers is the fact that there is a fixed cost associated with capital raising thereby increasing the cost of financing per dollar raised Chart 2h: Average Size of Equity Financings on the TSXV (Quarterly) Source: MECO, Gamah International Ltd. and PDAC calculation

19 18 Debt Issuance Increases while Equity Suffers It is worth highlighting that most junior mining companies depend on equity financing to raise money whereas the major mining companies chose to issue debt. Since 2007, 78% of financing was attributable to equity on the TSXV, where majority of junior mining companies are listed compared to 38% of financing using equity on the TSX. By comparison, equity is even greater portion of financings on the CSE at 87% for the same period (see Chart 2i on the right). TSX-V TSE CSE Chart 2i: Debt vs. Equity on Canadian Exchanges 38% Equity 78% 87% Debt 62% Source: Gamah International Ltd. and PDAC calculations 22% 13% The figures in table 2b below show that the share of debt financing has increased over time for both TSX and the TSXV. In 2007, debt accounted for only 4.7% of capital raised on the TSXV and in 2013 and 2014 peaked to 48 and 47% respectively. The popularity with debt financing is strongly correlated to lower lending rates and the attraction of fixed income products in the capital markets. As interest rates remain low and investors seek stable returns, it can be expected that the demand for debt financing will continue in the foreseeable future. In the case with the TSX, the level of debt financing is at an all-time high at 81.4% in For the Venture exchange, 2013 and 2014 were the highest share of debt financing at 48% and 47% respectively, which shows that when given the opportunity to do so, public companies in the mining space chose to issue debt over equity. However, this is not possible for juniors without revenue to service debt. Table 2b: Equity vs. Debt on the TSX and TSXV Year TSX TSX-V Equity Debt Equity Debt % 47.8% 95.3% 4.7% % 70.6% 76.7% 23.3% % 47.5% 72.0% 28.0% % 46.2% 90.7% 9.3% % 75.9% 89.3% 10.7% % 77.9% 58.7% 41.3% % 55.1% 52.2% 47.8% % 81.4% 52.7% 47.3% % 62.2% 78.0% 22.0% Source: Gamah and PDAC calculations

20 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q State of Mineral Finance Sharp Drop in Canadian Listings By the end of 2014 there were 1,201 and 291 mining companies listed on the TSXV and TSX exchanges respectively, which was an 8% drop in the number of companies listed on the two exchanges. By comparison, 96 companies were listed on the CSE by the end of Chart 2j illustrates the number of companies on the TSXV, which comprised majority of the junior exploration and development companies. If the current trend continues during 2015, we could see another 7% drop (80 companies) in the number of companies listed on the TSXV. 1,350 Chart 2j: TSXV Number of Mining Companies 1,300 1,250 1,200 1,150 1,100 1,050 1,000 Source: TMX Group The table below is a snapshot as of December 31, 2014 of the mining sector listed on the three Canadian exchanges, namely TSXV, TSX and CSE. The combined market capitalization of all mining companies in the three exchanges totalled $229.4 billion and a total of 1,588 mining companies. Table 2c: Mining Sector Activity at a Glance YTD December 31, 2014 TSXV TSX CSE TSXV, TSX & CSE Number of Issuers 1, ,588 QMV (C$ thousands) 9,307, ,692, , ,446,680 New Listings Equity Capital Raised (C$ thousands) 1,832,973 7,025, ,622 9,013,146 Number of Financings 1, ,694 Volume Traded (thousands) 20,661,458 28,516,000 2,336,377 51,513,835 Value Traded (C$ thousands) 3,828, ,992, , ,318,593 # of Trades (thousands) 2,321 46, ,545 Source: TMX Group and CSE

21 20 Share Prices Reach Bottom Share prices for the TSXV continued to decline, falling from 12 cents a share to 11 cents a share from 2013 to Despite share consolidation, prices were not able to recover in Form the 2007 peak, this was a major drop of 83%, which is much more severe than the mining companies listed on the senior exchange. $0.7 Chart 2k: Average Share Price for Mining Companies Listed on the TSXV $0.62 $0.6 $0.5 $0.51 TSXV Average Share Price $0.4 $0.3 $0.2 $0.15 $0.31 $0.30 $0.20 $0.12 $0.11 $0.1 $ Source: TMX Group and PDAC calculations The majors listed on the senior exchange, recorded a decline in prices from 2013 to 2014 from $3.25 to $3.15 (see chart 2l below). When we compare the prices form the peak in 2007, it was a 57% drop in average share prices. Chart 2l: Average Share Price for Mining Companies Listed on the TSX 8 7 $7.4 $ $5.8 $5.2 $4.7 $4.0 4 $3.2 $ Source: TMX Group and PDAC calculations

22 Billions State of Mineral Finance Mergers and Acquisitions Increase The number of M&A deals has reached an all-time high in 2014 both at the global level and in Canada. 62 deals were announced in Canada in 2014 compared to 158 globally (which includes Canadian deals) Chart 2m: Number of M&A in the Mining Sector Global Canada Source: SNL In terms of value, global M&A activities have fallen to $16.7 billion in 2014 since reaching a peak of $64.5 billion in In Canada, M&A activities have fallen in 2012 to $4.9 billion then improving to $7.1 billion in ended with deals worth $6.3 billion, which is far lower than the peak of $17.2 billion reached in $70 $60 $50 $ Chart 2n: Global and Canadian M&A in the Mining Sector Global Canada $30 $ $ $ Source: SNL

23 22 Top 10 mining deals in 2014 are listed in the table 3 below. The largest deal was the Albemarle Corporation and Rockwood Holdings, Inc. M&A worth $6.6 billion followed by Investor Group and Osisko Mining Corporation at $3.8 billion, which was the largest Canadian M&A in Majority of the commodity in the M&A deals are Gold and Copper with the exception of the Lithium deal in the USA. Table 2d: Top 10 Mining Deals in 2014 Buyer Name/Target Name Announcem ent Global to 10 M&A Albemarle Corporation/Rockwood Holdings, Inc. Investor Group/Osisko Mining Corporation Polymetal International Plc/Altynalmas Gold Ltd. B2Gold Corporation/Papillon Resources Limited Industrias Peñoles, S.A.B. de C.V./Penmont joint venture HudBay Minerals Inc./Augusta Resource Corp. First Quantum Minerals Limited/Lumina Copper Corp. Rio Alto Mining Limited/Sulliden Gold Corporation Ltd. BC Iron Limited/Iron Ore Holdings Primary Commodity Value (C$M) Buyer Country Target Country 15/07/2014 Lithium 6,636 USA USA 16/04/2014 Gold 3,838 Canada Canada 22/05/2014 Gold 1,219 United Kingdom Kazakhstan 03/06/2014 Gold 619 Canada Australia 12/09/2014 Gold 496 Mexico Mexico 09/02/2014 Copper 443 Canada Canada 17/06/2014 Copper 416 Canada Canada 13/06/2014 Gold 331 Canada Canada 11/08/ Australia Australia Ltd. Investor Group/Primero Mining Corp. 05/03/2014 Gold 224 Canada Canadian top-10 M&A Investor Group/Osisko Mining Corporation B2Gold Corporation/Papillon Resources Limited HudBay Minerals Inc./Augusta Resource Corp. First Quantum Minerals Limited/ Lumina Copper Corp. Rio Alto Mining Limited/Sulliden Gold Corporation Ltd. Agnico Eagle Mines Limited/Cayden Resources Inc. Taseko Mines Limited/Curis Resources Ltd. Mandalay Resources Corporation/ Elgin Mining Incorporated Corsa Coal Corporation/PBS Coals Limited Sandstorm Gold Ltd./Sandstorm Metals & Energy Ltd. Source: SNL 16/04/2014 Gold 3,838 Canada Canada 03/06/2014 Gold 619 Canada Australia 09/02/2014 Copper 443 Canada Canada 17/06/2014 Copper 416 Canada Canada 13/06/2014 Gold 331 Canada Canada 08/09/2014 Gold 177 Canada Canada 08/09/2014 Copper 78 Canada Canada 04/06/2014 Gold 68 Canada Canada 15/07/2014 n.a. 64 Canada USA 21/04/2014 n.a. 45 Canada Canada

24 $ Billions State of Mineral Finance SECTION III: Exploration Trends Global Exploration Budgets Hit Hard Exploration budgets for every major mining jurisdiction have decreased in 2014, with the largest annual declines in the Pacific/Southeast Asia region followed by Australia (see Chart 3a below). Globally, exploration budgets have dropped by 26% reflecting weak commodity sector and lack of prospects for a robust recovery in commodity demand. Canada and Australia continue to be the two key mining countries with a total budget of $1.5 billion (13.9%) and $1.3 billion (11.7%) respectively (see Chart 3b). 25 Chart 3a: Exploration Budget by Location USA Rest of World Pacific/SE Asia Latin America Canada Australia Africa Source: SNL Chart 3b: Share of Budgets by Locations in 2014 USA 7.1% Africa 16.0% Rest of World 19.1% Australia 11.7% Pacific/SE Asia 5.6% Latin America 26.7% Canada 13.9% Source: SNL

25 $ Billions $ Billions State of Mineral Finance When we break down the global exploration budgets by stages, not only do we see a decline overall but that the share of grassroots exploration budget has been declining since 2007 with a small uptick in 2011 and Grassroots budget accounted for 38% in 2007 and in 2014 declined to 30% of overall exploration budget. Chart 3c: Exploration Budget by Stage 25 45% % 35% 30% 25% 20% 15% 10% 5% 0% Minesite Late Stage & Feasibility Grassroots Share of Grassroots Source: SNL As the share of grassroots exploration declined, so did the share of junior companies exploration budget. In 2007, juniors made up 55% of exploration budgets while in 2014 the share has shrank to 32%. There is a strong correlation between grassroots budget and junior companies share of the exploration budget since majority of grassroots exploration is done by juniors. Chart 3c and 3d illustrate this correlation clearly. Chart 3d: Exploration Budget by Company Type 25 60% 20 50% % 30% 20% 10% 0% Major Junior Intermediate Government Other Junior Share Source: SNL and PDAC calculations

26 $ Billions State of Mineral Finance Average corporate exploration budget has declined in 2014 to $138 million from $190 million in the previous year, which is a 27% drop. As reported by SNL, the number of junior and intermediate companies with current exploration budgets and revenue fell to 252 in 2014 from 273 in Sharp Drop in Canadian Exploration Budgets Canada remained the top destination for non-ferrous exploration despite exploration expenditures in Canada dropping 22% over 2013 levels. Australia was the second most popular destination, despite nonferrous exploration expenditures in that country dropping 34% over 2013 levels. If iron ore and coal exploration budgets are included, however, SNL Metals and Mining data suggests that Australia has actually been the top destination for exploration since at least Although Canada does not have a significant lead over Australia for exploration expenditures ($1,254 million vs. $1,487 million), Canada is the leader by a wider margin when it comes to raising capital for exploration budgets based on location of headquarters. In 2014, companies with headquarters in Canada accounted for 32.1% or $3.4 billion of all exploration budgets while the share of exploration budgeted to be spent for Canadian exploration was 13.9%. For Australia the share by headquarter is 17.6% or $1.9 billion, which is far less than that of Canada s share. The table below shows the breakdown of the Canadian exploration budget by stages of development. Table 3a: Canadian Exploration Budget by Stage of Development, ($M) Stages Grassroots , Late Stage & Feasibility 1, , , Minesite Total 2, , , , ,487.4 Source: SNL Chart 3e: Canadian Exploration Budget by Stage % % 40% 30% 20% 10% 0% Minesite Late Stage & Feasibility Grassroots Share of Grassroots Source: SNL

27 Q1/2007 Q2/2007 Q3/2007 Q4/2007 Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 Q2/2009 Q3/2009 Q4/2009 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014 Billions $ Billions State of Mineral Finance Canadian exploration budget has been following the same trend as the global exploration budget, however, for Canada the declining trend began a year earlier than the global trend Chart 3f: Canadian Exploration Budget by Type of Company 90% 80% % 0.6 Major 60% 0.3 Junior % % Intermediate % Government % Other % Share of Juniors % Source: SNL As you can see from the above Chart 3f, although overall the budgets fell for exploration, the share for juniors has remained flat between 2013 and Capital Raised for Exploration Falls off a Cliff Capital raised for exploration only activities has fallen from the $4.5 billion peak reached in Q4 of 2007 to a capital crisis induced low of $170 million in Q4 of Exploration companies are experiencing capital raising challenges all around the globe with no signs of recovery. Particularly challenging are financings for grassroots exploration activities Chart 3g: Global Exploration Financing (Announced) Source: MECO, Gamah International Ltd.

28 Millions State of Mineral Finance As with the global figures, the amount of capital raised in Canada identified only for exploration has dropped dramatically over the years. After peaking at $1.3 billion in the second quarter of 2007, it has declined to a low of $58 million in Q The final quarter of 2014, the amount of capital raised that was dedicated to exploration only was $150 million, a 96% drop from the peak. Canada is a premier destination for raising mining capital where 67% of the equity capital raised globally was raised on TSX, TSXV and the CSE during Q4 of For exploration financing, the share was even higher, at 88.2%, making Canada an exclusive jurisdiction for exploration financing. In Q3 and Q1 of 2014, 100% of all exploration financing took place on Canadian exchanges. $1,400 Chart 3h: Announced Financing Specifically for "Exploration" by Issuers Listed on Canadian Exchanges (TSX, TSXV and CSE) $1,315 $1,274 $1,200 $1,105 $1,000 $800 $600 $400 $200 $- $531 $261 $249 $226 $173 $70 $264 $254 $177 $195 $346 $204 $500 $464 $278 $112 $431 $335 $357 $202 $294 $122 $141 $150 $104 $76 $80 $91 $58 Source: MECO, Gamah International Ltd. and PDAC calculations Working Capital Turns to Survival Capital Working capital has fallen dramatically for companies on the TSXV. According to SNL data (for companies that reported working capital), 231 companies had less than $200 thousand in working capital in 2014 and 195 companies had negative figures for the same period was even worse, when 430 companies reported having less than $200 thousand working capital and 350 companies with negative working capital. As working capital dries up, so does exploration activities. In order to maintain a listing as a public company and meet the compliance requirements, these costs can start at $200 thousand. What this means is that companies with $200 thousand or less are not doing any exploration activities but trying to survive.

29 28 Despite the dire situation portrayed in Chart 3i, 2013 seems to be the year when most culling of companies took place. Without new companies to take the place of companies that were not able to survive the downturn, the exploration industry remains in a poor state. 450 Chart 3i: Working Capial for Mining Companies Listed on Canadian Exchanges Below $200K Working Capital Negative Working Capital Source: SNL

30 29 SECTION IV: Fiscal Support and Capital Market Reform Canada is a leader for exploration and mineral financing. In order to maintain its leadership, there is a need to provide an enabling environment for the industry to flourish. In a downturn, such as the one the industry has been experiencing over the last few years, it is of greater importance to provide the right fiscal landscape for the industry. Without the right incentives in place, risk capital becomes harder to access during a downturn and an increasing competitive environment. A good example is the innovative flow-through system in Canada, which has been l tremendous help to the industry. Additionally, capital markets play a crucial role in helping the exploration and development companies to raise risk capital from retail investors. New reform to the capital markets are needed to adapt to the new structure of capital markets that employ new technology and develop new products. The traditional model of how exploration companies were financed in the past has changed and capital market reform is needed to adapt to new ways of raising capital from both private and public markets. The Cooperative Capital Market Regulator and new exemptions, if done right, are a step in the right direction. Use of Flow-Through Shares Buffers the fall in Financings Flow-through shares 4 are a major source of financing that is targeted specifically to exploration activities in Canada for companies listed on Canadian exchanges. Flow-through can help attract capital back to juniors, and back to grassroots exploration because of the ability for investors to benefit from the Mineral Exploration Tax Credit (METC). 5 PDAC was the first organization to recommend the government implement a flow-through program for the exploration sector and has consistently supported the federal government to keep the METC in place. The credit was initially implemented in October, 2000 for three years as an interim measure, extended annually. In the federal government s Budget 2013 the METC was extended with expiry date to March 31, The use of flow-through shares as a share of total capital raised specifically for exploration tend to peak during time of financing difficulty. Chart 3j shows the total amount of financing for exploration purposes only from 2007 to 2014, which shows that the amount of financing has fallen from $1.3 billion during Q4 of 2007 to a low of $150 million in Q4 of Without an incentive as offered by the flowthrough system, financing would have fallen even further. 4 To understand how the flow-through share works, please see Canada Revenue Agency website: 5 For a description of the METC, see Natural Resource Canada website:

31 Q1/2007 Q2/2007 Q3/2007 Q4/2007 Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 Q2/2009 Q3/2009 Q4/2009 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014 Millions State of Mineral Finance $1,400 $1,200 $1,000 Chart 3j: Flow-Through Financing for "Exploration" by Issuers Listed on Canadian Exchanges Flow-Through Total Exploration Financing $800 $600 $400 $200 $- Source: MECO, Gamah International Ltd. and PDAC calculations Chart 3k below shows the share of financing using flow-through. The data shows a clear relationship between the use of flow through and the downturn in financing activities. Since 2008, flow-through shares has been the saviour of Canadian exploration sector. Flow-through has accounted for 72% of all financing raised for exploration stage activities from 2012 to 2014, highlighting its importance as an incentive attracting capital to the riskiest stage of the mining cycle. 100% Figure 3k: Total Exploration Specific Financing - Share of Flow-Through 90% 87.0% 80% 70% 60% 67.6% 62.3% 54.3% 69.3% 61.2% 68.1% 50% 40% 30% 25.4% 20% 10% 0% Source: MECO, Gamah International Ltd. and PDAC calculations

32 31 Regulatory Developments in Canadian Capital Markets The Canadian capital markets have been going through changes both at the provincial level as well as structural shift in the way regulations are implemented in Canada. New exemptions along with a cooperative regulatory regime are major changes to the Canadian regulatory landscape in Canada that could have a profound impact on the way junior issuers raise capital in Canada. New Exemptions Could Help Jurisdictions across Canada are responding to the capital crisis by putting forth a range of exempt market proposals (some of which are new; being adopted by a wider range of jurisdictions; and others being modified). On June 18, 2014, PDAC made 8 submissions 6 related to four types of exemptions: Offering memorandum exemption (OM); Family, friends and business associates exemption (FFBA); Existing security holders exemption; and Crowdfunding (and start-up crowd-funding) exemption. 1. OSC - Existing Security Holder (proposed s. 2.9 of OSC Rule Ontario Prospectus and Registration Exemptions) Proposal to introduce a new prospectus exemption that would allow noninvestment fund issuers listed on certain Canadian stock exchanges to distribute securities to existing security holders in prescribed circumstances. This exemption is in effect starting February 11, 2015 throughout Canada; however it will be subject to different treatment in Ontario OSC - Family, Friends and Business Associates (s. 2.5 and proposed s of NI ) - Proposal to introduce a family, friends and business associates prospectus exemption similar to those in other CSA jurisdictions for non-investment fund issuers. Ontario will be adopting a Family, Friends and Business Associates Prospectus Exemption effective May 5, 2015, which will be largely harmonized with the FFBA exemption in the rest of Canada. 6 To see the full submissions by PDAC on the above regulatory proposal, please click on link: 7 In Ontario, it is not available to investment funds; the issuance must not result in an increase of more than 100% of the outstanding listed securities of the issuer; and the OSC rule provides for Secondary Market Disclosure Liability, which includes an right of action for damages as compared to the CSA rule that provides for Contractual Liability, which includes recession rights. One area of difference that will be harmonized with the CSA rule is that the OSC rule does not require a pro-rata distribution requirement. Instead the OSC has provided guidance in the companion policy to OSC Rule i.e. the OSC expects issuers to fairly allocate investment opportunities among all of the issuer s security holders.