An adapt-or-die moment for junior miners – by By: Alisha Hiyate (Mining Markets Magazine – May 21, 2013)

Survival in indifferent market will depend on tapping alternative financing options

Newsletter writer and mining analyst John Kaiser sounds a little dejected as he describes the utterly bleak state of the mining industry today. “The phones are completely dead, nobody cares,” says the editor of Kaiser Research Online. “Companies can’t raise money, it’s like a complete dying sector.”

Kaiser made a now-famous prediction last year that around 500 juniors were bound for “extinction” because of an inability to raise capital, low share prices and negative sentiment on commodities.

As of mid-May, that number has grown: Of the roughly 1,800 publicly listed TSX and TSXV companies involved in mining or exploration and listed in the KRO database, 694 had less than $200,000 in working capital — basically the amount needed annually to maintain a listing. Kaiser adds that about 70% of all the companies in the KRO database are trading at below 20¢.

“It’s starting to feel like 1999, and we still had several more years to go after that,” Kaiser says of the last prolonged downturn in the industry. “That’s when the dot-com stuff was taking off and I remember subscribers mocking me for still talking about resource stocks, they were history — technology was the place to be.”

Whether the current difficult conditions last as long as that is impossible to predict. But both producers, which have been hit with massive cost inflation, and juniors, which have been dealing with a capital-anemic environment for the past two years, are in for more pain. In the next phase, we can expect uneconomic mines that were built in the previous rush to meet escalating Chinese demand to be shut down, close to zero exploration (by both juniors and majors), mass de-listings, and a fair amount of consolidation. (See related article: Juniors should consider M&A as a ‘defence mechanism in tough market.)

So who will end up surviving the current market, when even the world’s biggest gold miner, Barrick Gold (ABX-T, ABX-N), finds itself trading at a 20-year low under $20 — depths it didn’t even reach during the financial crisis?

Even during this slow, grinding period, for companies with good management and projects that can demonstrate a path to production and relatively low capex, there are ways forward, says Peter Gray, managing director of the minerals capital and advisory practice at U.S. investment bank Headwaters MB.

Gray says few companies are making use of the alternative sources of capital that are available to them.

“Far too many of them are focused just on survival, and their plan for survival is to preserve cash,” Gray says. “The reality is there’s a lot of capital there — there’s pools of capital that will invest in the mining space for quality assets.”

Blindsided juniors aren’t necessarily ready to deal, but because traditional bank debt and equity sources have dried up, they will have to seek out new partners. Those partners, which have a long-term view on commodities and are stepping in to take advantage of low valuations in the sector, could include sovereign wealth funds (such as China Investment Corp.), and private equity in the form of resource funds (Resource Capital Fund, for example), family office money (Electrum Group) or commodity traders (like Trafigura’s Galena fund).

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One Response to An adapt-or-die moment for junior miners – by By: Alisha Hiyate (Mining Markets Magazine – May 21, 2013)

  1. Edward June 4, 2013 at 12:49 am #

    Agreed. Mining companies have absolute control over their destiny. Where there is no interest from investors at the equity level, there is tremendous interest from investors at the asset level.

    Why dilute shareholder equity by financing at 80% discount from previous highs and yet the underlying value to these assets have not changed one bit. The asset is valuable and still worth what it was before the market meltdown. If any financing needs to be done, it needs to be done at the asset level and although there is no interest at investing at the equity level, investors in the United States and Asia are interested in teaming up with companies in Canada to invest at the asset level. Investors, be they private equity or sovereign wealth funds, want to make the investment, they just want to see the project directly from the project owners. What we really needs is a neutral platform to bring projects and investors together.