Braving the elements in adverse conditions

When the downturn bites, it is never the large end of the industry that bears the brunt of the contraction, but the junior operators.

Continued weak commodity prices and shrinking demand have taken its toll on mining, as the market value for listed miners slips below US$1 trillion.

This dip is the first time the market value of mining’s listed companies has fallen below this level since April 2009, and it is mostly the juniors that are making up this fall.

“It goes almost without saying that FY15 was yet another extremely challenging year for JUMEX companies,” Holly Stiles, national head of energy and resources for Grant Thornton Australia stated in the annual junior mining and exploration (JUMEX) companies reports.

“While mining is a cyclical industry with periodic highs and lows, many in the industry agree that conditions are as tough as they have ever been,” she said.

So what are the top issues affecting junior miners and explorers?

Access to capital and funding the major is number on the list, as money to carry out exploration dwindles.

“This has been the number one constraint for the past three years,” Association of Mining and Exploration Companies (AMEC) CEO Simon Bennison explained.

PricewaterhouseCoopers, in its Junior Mine report, did not mince words on the current state of the industry.

“The junior mining sector remains caught in the midst of an unparalleled downturn. Equity and debt markets have dried up and cash reserves are reaching new lows,” it said.

The JUMEX report added that only 15 per cent of junior miners see this situation changing any time soon.

According to a recent report by SNL Metals, there has been a 50 per cent drop in the number of financings by companies with annual revenue of less than US$500 million; this represented the lowest number of financings by exploration companies since at least January 2012.

When it comes to actual cash on hand, the situation is grimmer still.

Stiles explained that 30 per cent of Australian juniors have less than $500,000 in capital while close to 10 per cent have less than $100,000.

“With half of our respondents planning a fund raising within six months and 29 per cent having a cash balance of less than $500,000 competition for capital remains extremely fierce and unfortunately there appear to be few positive signs of any improvement in investor interest in the short term,” Grant Thornton’s JUMEX report said.

This investor skittishness and lack of operational funding is a constant concern for junior miners, and even when the market recovers it is unlikely to affect the JUMEX sector first.

“Juniors are likely to benefit after the majors, as they’re quite speculative for investor interest,” Stiles told Australian Mining

The closely related issues of deteriorating share price and ongoing volatility in the commodities market rank second and third respectively.

In a similar vein market instability ranked as the fourth highest concern for juniors, while ongoing regulatory challenges rounded out the top five issues.

But the question remains, how can the industry turn it around?

PwC believes that doing no­thing is no longer an option.

“Waiting is no longer a viable strategy: junior miners need to take urgent action now, before crisis hits, and do what­ever it takes to find the cash to keep their businesses and projects moving forward,” it said.

“Explorers need to consider a range of approaches, such as collaboration, they’re negotiating with services companies who are willing to drill or work for equity in the operation,” Stiles added.

One approach is getting out of the mining game altogether, as backdoor listings become more prevalent.

“Whilst it would not be the outcome any mining executive would hope for, such transactions may present an opportunity to provide some ongoing values to shareholders when all other opportunities for the company’s resources projects have been exhausted,” Stiles said. 

To date three junior miners have been used as a vehicle for medical marijuana growing, while others are opening the door to new technologies.

Some, however, may simply merge with other businesses in order to stay afloat.

According to Deloitte CIS mining leader Nikolay Demidov: “The lack of capital available to juniors may force a dramatic industry collaboration.”

“Some projects will need to be shelved, most development-stage projects will be put on hold, and many distressed companies should consider ways to strike a merger of equals,” he said.

According to IBISWorld, after the settling of the current uneven commodities market an era of consolidation will take hold, with more mergers and acquisitions as a result of these tight capital markets.

However Stiles believes that while we have been expecting this wave of mergers and acquisitions, “the cost of company mergers are particularly high, so it has been prohibitive”.

As such, “the number of companies to exit the sector is likely to increase”.

However there was one slightly positive aspect, with more Australian explorers turning back to Australia for new discoveries.

“The survey reveals a positive trend in recent years for companies to refocus on Australia for future project acquisitions,” AMEC’s Simon Bennison explained.

“Australia is also proving to be relatively attractive for investment with 74 per cent of respondents having received an approach or conducted a transaction with overseas investors.

Stiles reaffirmed to Australian Mining the need for collaboration and innovation: “Try to be creative as possible to advance projects, think about how to maximise every dollar spent, and the new technologies currently emerging.”

“With technology playing an increasing role, cost-cutting and operational efficiency is no longer enough; JUMEX companies need to embrace technologies to maximise results from activities they undertake and must be more creative in restructuring solutions to fund and develop their projects.”

Despite this view, one respondent to the JUMEX survey stated: “It takes a very brave company to invest in innovation when cash is constrained, even though there is no more important time to innovate.”

For the sake of junior miners and explorers in Australia, let’s hope they are brave.

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