PDAC International Convention

Cash shortfalls threaten mining explorers with extinction or de-listing

Hundreds of TSX-listed junior mining companies are caught in a tightening squeeze for money, which threatens to clean-out a number of them, say mining experts.

Author: Euan Rocha
Posted: Thursday , 07 Mar 2013

TORONTO (Reuters) - 

A purge of exploration-stage mining companies seems inevitable over the next 18 months as cash shortages threaten hundreds with extinction, de-listing or bankruptcy, industry insiders say.

With the mining sector enjoying an extended bull run in recent years, the ranks of explorers listed on Canada's TSX Venture Exchange - the world's biggest market for start-ups in the sector - has ballooned to over 1,300, accounting for almost 60 percent of all companies listed on the exchange.

Hundreds of these companies are now struggling, caught in a tightening squeeze for money, according to executives at this week's Prospectors and Developers Association of Canada mining convention in Toronto - the industry's largest annual meeting.

"There will be a clean-out. It has to occur," said David Strang, chief executive of Lumina Copper Corp. "It's no different than the Internet boom of the late 1990s where there was cheap venture capital money available - everybody built all of those companies and very few survived."

Junior mining companies flock to PDAC each year to drum up cash to sustain their operations, or better yet, entice a larger player to acquire them. But this year's pickings are slim for an expanded group of explorers that has grown desperate.

"A lot of companies are looking for survival financings right now," said Mark Zastre, the global industry head of mining for Grant Thornton, a Canadian accounting firm. "We are seeing it with our clients, every option is on the table right now."

In the last three years alone, some 218 new metal and mineral exploration companies listed on the TSX-V. But equity financings, the life-blood of juniors, have all but dried up. A bigger pool of companies is trying to tap a smaller pot of capital.

"I think we need to clean up the junior sector," said Greg Gibson, chief executive of Northern Gold Mining Inc. "There are just too many junior companies."

INAUSPICIOUS START

Juniors typically raise most of the money they need to fund exploration programs in the first quarter. But January and February data from Oreninc - a firm that tracks financing activity in the sector - suggests a bleak year ahead.

Total equity capital raised by miners on the Toronto Stock Exchange and TSX-V in the first two months of 2013 dropped 58 percent to C$558 million. That's down from C$1.36 billion in the first two months of 2012, and C$2.46 billion in Jan-Feb 2011.

Even more worrying, the average offering raised only C$2.9 million this year, down from C$4.6 million in 2012 and C$9.7 million in 2011. Much of that will be used to pay listing fees, bankers, lawyers, auditors and other overhead costs, leaving little to fund a drill program and generate value for investors.

DIRE STRAITS

Not long ago, investors were infatuated with mining. But their enthusiasm waned as stagnating metals prices and spiraling costs brought big cost overruns and writedowns on the value of assets acquired for top dollar at the peak of the boom.

Chief executives of some of the biggest mining companies have been axed, their successors vowing austerity.

"There is a mood across the board that mining companies are not running their operations properly, that they are not giving clarity to investors and that there are perpetual cost overruns and write-offs being taken," said Daryl Hodges, chief executive of Jennings Capital, which helps raise financing for miners. "So there is a complete change in (investor) attitudes."

A Grant Thornton survey of 389 miners in the United Kingdom, South Africa, Australia and Canada showed that 43 percent of them had cash balances of less than $2 million. Nearly 40 percent needed to tap markets within the next six months.

The picture for the Canadian companies surveyed is even worse, with 54 percent having cash balances of less than $2 million and 49 percent needing cash in the next six months.

"The big concern is where the financing markets are going to be for the mining sector in the near future," said Carmen Diges, who heads the mining group at Miller Thomson. "I don't think ... We can look at the traditional equity markets as a source of financing for the juniors for a long time."

DESPERATE TIMES, DESPERATE MEASURES

To be sure, there are alternatives to equity financing, said Michael White, chief executive of IBK Capital, an independent investment banking firm.

"There's always the ability to raise funds through a royalty deal or stream deal and that can be done at a very early stage," said White. "Some juniors have looked at convertible debt, where the asset is the collateral or the security."

 There is also the prospect of joint ventures or partnerships with larger players, and even acquisitions or mergers, but many say only companies with strong assets will attract attention or secure such deals.

 And for such companies with great assets, Hodges sees hope.

"This is sort of the darkest hour just before the dawn" said Hodges. "I'm of the view that from this point forward very high quality projects and stories will get financed, it won't be a strong momentum play, it will be a rifle shot game."

 

Tags: Mining, investments, mining and metals, mining exploration, junior mining, TSX, IBK Capital, Grant Thornton, PDAC, Miller Thompson, mining investment, mining finance, Lumina Copper

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10 May 2013


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