Grant Thornton’s JUMEX report looks at ASX listed junior mining and exploration companies with a market cap of less than $500 million.
The company’s national head of corporate finance Paul Gooley led the research behind the report which found that only 4 per cent of ‘junior miners’ were in the mining or production phases, the majority were still exploring.
Funding issues out into the open
Junior miners and explorers in their early phases don’t often receive a lot of attention from media and government, largely because they’re busy exploring and searching for funding to continue the development of their assets rather than sending out press releases to various media outlets.
The report found these companies are facing a number of constraints, including the availability and instability of equity capital, market volatility, and government red tape and policy with the introduction of the carbon tax and MRRT.
Gooley said the availability and difficulty of sourcing funding are major challenges with 68 per cent of companies’ surveyed saying they expect to raise capital in the next 12 months.
“It’s very challenging conditions and has been for the last 12 months, we don’t see that dramatically changing in the next 12 months, given where we are in terms of the market.
“The underlying message is that companies need to focus on the opportunities in the market, there’s going to be a lot of corporate action, a lot of acquisition opportunities, and there are still a lot of opportunities out there.” Gooley said.
Murray Hutton, technical manager at Geos Mining stated that most juniors are struggling for funding at the moment and that “reports of short term doom and gloom lose sight of the bigger picture.”
“Many [juniors] have very good exploration projects, but the general feeling is that ‘we can’t hope to get funding in this market’ and so they have been forced to look overseas for investors.” Hutton said.
Opportunities for junior miners and explorers
Talking about opportunities in the market, Gooley spoke about the experience of Western Australian based nickel and copper miner Sirius Resources who were down to their last drilling exercises funding would allow when they managed to hit a large nickel seam. Subsequently their shares rose 4500 per cent in two months from .6 cents in July to peak at $3 a share, valuing the company at more than $600 million.
“You need to keep focusing on your core, you need to keep exploring, you need to be true to your strategy, because that’s why everyone’s in this game it’s about hitting that big seam and despite the issues if you remain core to your strategies there are opportunities.” Gooley said.
With an abundance of opportunity competition for capital is on the rise, forcing junior mining companies to look into private placement and alternative funding solutions both locally and internationally as well as taking extensive cash preservation measures and entering into joint ventures or considering take-overs.
According to Hutton, for those junior explorers with cash, the current situation is a bonus, particularly with the availability and pricing of services like drilling contractors, geophysics contractors and technical personnel.
“It is a sad irony that the best time for a junior company to be exploring is when the market is in the doldrums.
“By the time the market improves, these services will again be in short supply relative to demand, as those companies with operating mines will have the cash to spend on their own exploration programs.” Hutton said.
Long term thinking needed
Hutton warned that there still needs to be a considerable shift from short term to long term investment.
“Exploration is a long-term venture, from inception to development takes, on average, at least 10 years and an exploration project would go through many stages along the road to mine development.
“Having access to funding at all stages is important and the investment community needs to understand that.
“I would encourage financial advisors and the media to focus on long-term potential rather than whether today’s price is lower than yesterday’s.” Hutton said.
Despite this, it is a great time for junior miners to be entering the market Hutton explained.
“From a technical point of view, this is a very good time for junior explorers to be entering the market. Availability of services and contractors is very good and prices have come down significantly, especially for drilling contractors.
“Twelve months ago, drilling rigs were in short supply and the contractors could demand very high prices for their services. Junior explorers that are short on cash will need to offload some of their projects in order to stay viable, sometimes at prices well below their true value. Therefore, it is definitely a buyer’s market.” Hutton said.
The report also flagged unstable commodity prices as a concern for junior mining companies. Since the April 2011 coal peaks coal has seen a price drop of 30 per cent and coking coal experiencing a drop of 40 per cent.
Such a significant fall in prices has seen companies redeploy resources, refocus business activities to take advantage of production opportunities and undertake in sourcing of tasks.
Hutton disagrees, saying “all of the commodities presented in their report [Grant Thornton] have seen price rises over the past 3 years and some have more than doubled! And yet, what was pointed out was that “the average price of the vast majority of commodities was considerably lower during 2012 than in 2011”.
He added that “these price drops affect the producers, not the junior explorers. Just because BHP-Billiton, Xstrata and Rio Tinto have shelved major developments and mine expansions, junior explorers should not be viewed as being in the same boat.”
Flexibility and informed decisions are the way forward
Talking about junior miners, Dan Peel Australian general manager of advisory consulting for Runge Limited said it is important for these companies to be able to make the right decision quickly.
“Juniors need to keep exploring, they need to keep putting holes in the ground and they need to keep developing their asset. Juniors will only stop doing work at their own peril.” Peel said.
Peel recommended junior miners take the time to put together a log book in order to efficiently access capital, detailing quantity of exploration, location of the asset, resource base, grade and quantity as well as the approach you will take to test and develop the asset. He went on to say the log book should also include what work has been done, what still needs to be done and who the management team is.
“Recently we have seen two companies who were given the opportunity to gain capital from Asian investors, one company came along and said ‘here’s the geology and she’ll be right.’
“The other company gave a very detailed approach, with geology, a business plan and the process in which they plan to do it.
“The first company didn’t even get through the first gate, the second got through with flying colours.”
Peel acknowledged competition for capital is on the rise, however stated that there is still funding out there, it’s just gotten smarter and has lost its appetite for risk in the market.
“There is still plenty of capital around and we’re seeing that capital come off somewhat slowly, it’s still getting to the quality assets and the quality management teams.” Peel said.
Deregulation and streamlining processes are a must
Funding difficulties aside, the report also highlighted issues around government process, Australian Mining reported a push from industry leaders to cut the red and green tape in Queensland, where in some cases prospective miners will have to complete the same paperwork two or three times for different government bodies.
Member for Mount Isa, Robbie Katter, is pushing through the legislation to unlock the land to miners.
Katter has tabled the Environment Protection (Greentape Reduction) and other Legislation Amendment Bill 2012 to assist miners and farmers.
The amendment seeks to make changes to a wide number of different existing acts, including the Aboriginal Cultural Heritage Act 2003, the Mineral Resources Act 1989, and the Petroleum Act 1923.
A major focus of the bill is the "streamlining and clarifying [of] information requirements".
Hutton told Australian Mining that cutting costly bureaucratic processes like this will go a long way towards assisting junior miners and explorers in their early phases.
“State governments are placing more bureaucratic, OH&S and environmental obstacles in their way, which takes up a large slice of what little funding they have,” he said.
Urging for collaboration between the state governments, Hutton recommended a standard set of mining and exploration procedures needs to be drawn up.
“The various State governments really need to get together and come up with a standard set of procedures with regards to mining and exploration. At Geos Mining, we have dealt with projects in all States of Australia and coming to grips with differences in the rules and regulations between States is an administrative nightmare,” he said.