Tracking the Trends with Deloitte 6 – Junior Miners Survival

Deloitte have released a list of the top ten industry trends we can expect in 2015. With a number of challenges faced by the sector this year, it’s important to stay a few steps ahead and pay attention to the indicators. As we all know, the mining industry is cyclical in nature, and despite the ongoing commodities downturn after the mining boom, the upswing is on its way. It's simply a matter of when we will start to see this resurgence.

Australian Mining takes a look at each of these ten tips from Deloitte to see what’s in store through this ebbing year in the mining cycle.

Junior Miners: Fighting for the Future

Junior miners are caught in a quandary.

They are currently trying to navigate the troubled commodity waters in the wake of the boom’s bust, while at the same time trying to generate investor interest.

In the recent Deloitte survey, it outlined the survival of junior miners as one of the most pressing issues for 2015.

The global cut back in exploration combined with a disinterested investment market is putting the junior miner space in a situation where it is now being forced to make short-term decisions that will harm long-term operations.

Deloitte explained: “With mining’s total return to shareholders still underperforming other sectors companies are under mounting pressure to boost short-term profits; in some ways this is impelling miners to ignore current investments that may deliver longer-term upside in favour of dodging investor ire by remaining cash positive.”

Essentially the drive and risky attitude needed by juniors to strive forward is being abandoned to satisfy the market for short-term results, putting the potential for any long-term operations in jeopardy.

In other words, the current environment has pushed juniors into survival mode, a situation that inversely may bring about their demise as they make wide ranging cuts to their organisations and expenditures to stay afloat.

“Juniors are still mired in cost containment and productivity improvement initiatives,” Deloitte Chile mining leader Christopher Lyon stated.

“Given how close some companies are to the wall, they’re actively seeking strategies to lower their cost profile, companies are still struggling to raise money and we’re sure to see more retrenchments in this area before these issues are resolved.”

As referred to in Section 5 of the Deloitte round up – Finding Financing, “junior miners have borne the brunt of investment reluctance to date, with nearly 200 Australian mining companies filing for bankruptcy between June 2013 and September 2014.

While this is removing what some would see as deadwood, it leaves a gap in the market traditionally played by juniors – that of the aggressive, risky explorer.

However these risky explorers are now few and far between.

In Grant Thornton’s most recent junior mining and exploration (JUMEX) report it painted a dire picture for the sector.

“At the company level, management remains heavily focused on financing considerations, taking their time and attention away from value adding operational and strategic development opportunities. Costs are cut to the bone,” Grant Thornton Australia’s national head of energy and resources Simon Gray explained

“This is compounded by a lack of investor interest.

“Exploration companies are finding equity finance almost impossible to access, as is reflected by the small number of Initial Public Offerings (IPOs) for mining and exploration companies

“At an industry level, the severe decline in exploration activities has far reaching impacts on future discoveries and significantly reduced spending by JUMEX companies which continue to have a major impact on the mining services community,” Gray said.

These juniors are now casting their net far and wide for new sources of capital, and attempting to boost their cash position by selling, however they are unlikely to receive the full returns given additional funding constraints also faced by potential buyers.

“Once the lifeblood of the industry, growth through acquisitions has seemingly dried up,” Deloitte explained.

This is unsurprising, as mergers and acquisitions have dropped to their lowest levels in a decade.

A new report out by EY shows deal value in Australia alone was $US4.7 billion in 2014, down from $US5.5 billion in 2013.

Deals for the year totalled 144, down from 178 in 2013 and at their lowest level since 2003, the report said.

Globally, US$103 billion worth of deals were carried out in 2007, whereas only US$12 billion was completed in 2013.

However, inversely this current tighter market may see more deals take place as “at some point, juniors may be forced to sell at any price,” Deloitte said.

According to Deloitte many companies are getting their assets in order to sell them off; however “the challenge is that most potential buyers lack access to the funds needed to pay full value for these assets – creating a transaction stalemate”.

Yet “given the plethora of assets poised to flood the market serious buyers can afford to be choosy – a factor that should impel would-be sellers to put their best foot forward before entering the transaction fray”.

However some may buck the trend that has a financial stranglehold on the industry by being more flexible.

“Flexibility is becoming the name of the game,” Deloitte said.

“That explains why management is becoming sanguine about their full range of options, from partnerships, joint ventures and mergers to sale, partial sale (such as royalty streaming arrangements) and consolidation.”

Looking forward the state of the market is brighter.

“It is important [juniors] begin preparing for a potential market turn over the next 12 to 18 months,” Deloitte said.

“As this turn takes place, companies will once again find themselves competing for capital and talent.

“Those that succeed over the long-term will be those that are ready to exit the starting blocks first. That’s why management should already be taking a longer view of the market, preparing their systems and position for the upside.”