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Aurelian Resources Inc.’s blockbuster discovery of gold in Ecuador in 2006 pushed the junior miner from a meagre penny stock to a stock market darling that at one point was worth $40 a share. Investors who had speculated on Aurelian cashed in and another junior mining success story was born.
But although Aurelian’s gold find was one of the highest-grade discoveries in recent years, the subsequent development of its gold property, done mostly by Kinross Gold Corp., which bought the company in 2008, might have played out very differently if it had occurred today.
“The perception that’s out there in today’s environment for junior developers and explorers is extremely negative,” said Wendell Zerb, a mining analyst at Canaccord Genuity. “The market is turning around and looking at the junior sector, saying, yes, there have been some successes, but acquisitions have slowed considerably and financing has dried up.”
Junior miners have always brought with them an extremely high risk-reward ratio. For every Aurelian there are easily a dozen failed companies that never see their projects go further than a few drill samples and a handful of over-hyped press releases. But for all the risk, there is no shortage of junior miners for investors to pile their cash into.
Some 2,100 junior miners are publicly listed in Canada. But even with such an abundance of choices, the negative sentiment hanging over them today makes success stories such as Aurelian feel like they’re from a bygone era.
Gregory Taylor, a portfolio manager at Aurion Capital Management in Toronto, points to several factors that have soured investors on junior miners in recent months.
For one thing, almost all junior developers and explorers depend on acquisitions or partnerships to build their mines after discovering a deposit. But the mining companies that have the necessary funds to help develop such mines have become more conservative in deploying capital.
“For a while, senior [miners] weren’t doing so much exploration — they were using the juniors to do what they call lower-risk exploration,” Mr. Taylor said. “They watched some of the juniors, and when they found something that looked interesting, they partnered with or bought the junior. That was almost like their exploration
A financing panel told the Reuters Global Mining and Metals Summit in late March that many large mining companies currently have full project pipelines, and since many are dealing with rising costs to operate existing mines, rushing out to buy junior miners has taken a back seat.
The lack of prospective buyers comes at a time when other financing options have become increasingly harder to rely on. Lenders, fearful of the eurozone crisis flaring up once again, are shying away from risk, making borrowing a difficult task for inherently risky companies such as junior miners.
Equity offerings, another way junior miners obtain funds, are also drying up, and the negative sentiment plaguing the mining sector is forcing valuations to fall across the board.
For the rest of this article, please go to the National Post website: http://business.financialpost.com/2012/04/20/junior-miners-lose-lustre-as-financing-options-partnerships-wane/