Resource World Magazine

M I NI NG Keeping the Dream Alive Mining is a cyclical business and the tide will eventually turn in favour of junior resource companies. by Simon Rees F ew in the mining industry will be sad to see the back of 2013. For many, the year was more like riding an express train into Dante's inferno, each circle of hell represented by subdued metal prices, choked-off equity options, unstable macros and the seemingly-inexorable rise in costs. The junior sector was hit particularly hard; for the 12 months ending June 2013, the market cap for the top 100 junior miners on the TSX Venture Exchange fell 44% to $6.49 billion compared with the 12 months ending June 2012, according to PricewaterhouseCoopers' annual pulse check, aptly titled this year as Survival Mode Continued. In addition, cash and shortterm investments among the top 100 fell to $1.2 billion, down from $1.9 billion. But there have been some positive developments, most notably in Q3. For example, Ernst & Young's Canadian Mining Eye index gained 5% during Q3 compared with the 34% decline reported for Q2. It also observed a general improvement in metals prices, with gold climbing above $1,300 per ounce in Q3, although the yellow metal has subsequently fallen to trade in the US $1,235/41 bracket at the time of writing. Ernst & Young also cited uncertainty for gold in reference to India's decision to curb imports by increasing duties. Other glimmers of hope are evident as 2014 arrives, although perhaps too few to have any immediate effect on the available financial options in a market that remains jaded and wary. "There's a funding drought and it's difficult to raise any sort of capital," head of Kaiser Research Online, John Kaiser, told Resource World. "Institutional money is not interested in discovery exploration; it's only interested in advanced projects. The institutions will keep their hands in their pockets until they see a higher trending metal price. [Meanwhile,] the retail investor remains completely shell-shocked." But prices will only find greater support when oversupply eases. "There's the feeling right now that a glut exists and this is weighing on prices and affecting resource performance. The sector needs reasons for excitement and to see money being put in rather than pulled out," Norton Rose Fulbright partner and mining and natural resources specialist Robert Mason told Resource World. In the junior sphere, Kaiser is closely tracking the storm and the blows being inflicted. "My latest figures are on 1,770 companies, with 1,025 trading below a dime. Of these, 817 have less than $200,000 capital left. Share rollbacks have started to pick up 32 www.resourceworld.com RW December 2013.indd 32 and we're seeing 10:1 rollbacks left and right," he said. Often predicted, the bonfire of the juniors has yet to occur as endangered companies fight tooth and nail to survive. "It's pretty amazing how long we've been able to stretch out the hangman's noose, so to speak," Michael Kosowan told Resource World. Kososwan is an investment executive at Sprott Global and an investment advisor at Sprott Private Wealth. But for many, the noose is tightening. "The big crisis point will come in May and April of 2014 when the audited financials are due," Kaiser said. "Most companies have a December 31 year-end date. Their accountants, if they are owed money from the past, can then no longer sign off on these financials. Whatever credit was extended to these companies in 2013 cannot be extended in 2014 and the management teams will then have to dig into their pockets. This is the point when I think we'll see a lot of companies fold their cards and disappear." So the current situation, albeit sometimes crude and often brutal, is acting as a form of quality control: the inherently weak or flawed juniors will be removed, leaving a leaner and fitter sector that is also easier to navigate. "[Too many] juniors were set up along the lines of three geologists deciding to go in business for themselves and then listing a project that should never have been drilled in the first place. These will be the extinguished ones," Kosowan said. Financial fandango Given the current conditions and concerns, it comes as no surprise that the primary objectives for companies is to seek out alternative financing models, such as streaming, royalties, offtakes or private investment. Mason, who has helped companies large and small formulate survival strategies, underlined financial concerns as the top priority. "Financing dominates most of our clients' time, particularly from the juniors into the midmarket," he said. "Alternative financing is really the only door open to most companies. [For example,] we could have an off-take agreement that's combined with a streaming or royalty deal that's then combined with another finance vehicle." The need to contain costs is another pressing concern. "Cutting the burn rate is the number one thing people must do, particularly within the smaller companies," Mason said. "In some cases this might mean reducing staff or exploration campaigns, possibly halting all drilling work. For many, it's a critical time." DECEMBER/JANUARY 2014 12/11/2013 6:12 PM

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