Budget kicks juniors while they’re down

Changes to exploration deductions and thin capitalisation rules announced this week in the budget has got industry leaders warning it will further exacerbate mining investment issues and hit the smaller miners where it hurts.

The changes, effective immediately, will save an estimated $1.1bn in deductions over the next 3 years.

Challenging times have settled upon the mining sector with volatile commodity prices and higher costs impacting both the major and minor players.

Market conditions over the last 12 months has made it incredibly difficult for juniors to raise funding, a sentiment that was echoed at this weeks investor and mining conference, Sydney Resources Round up.

TriAusMin managing director, Wayne Taylor was amongst the myriad of juniors who were carefully presenting business cases which highlighted projects were “downturn proof”.

Discussing the company’s Woodlawn project located in the Lachlan Fold Belt between Sydney and Canberra Taylor explained access to existing power and transport infrastructure, a good resource base and strong community support means the “project will still make money in today’s market”.

"We've still got more work to do. On the tailings treatment project we are in a pretty solid position to move that ahead, but it is subject to acquiring financing and that's a $100 million equation for us," he said.

On the flip side, a number of investors yesterday were excited about the prospect of picking up undervalued mining stocks over the next few months.

Bob Kennedy, chairman of a number of junior mining companies, including emerging iron ore junior Flinders Mines, told The Australian that recent changes in the Federal budget were yet another imposition on a market that was already "really difficult" to raise funding in.

Kennedy added that closing a loophole by changing exploration deduction rules will send negative signals to the lower end of the market and will affect cashflow from operations.

"In a high-risk business, such as mining, it is a significant loss of concession with this change and it will affect the price at which assets are sold because they will be worthless because the cashflow has altered unfavourably," he said.

"As a seller of an asset it will be unfavourable because the buyer would want to pay less because they have to pay money upfront."

Already the resource sector is experiencing a decline in exploration activity, a trend which has been blamed on decreasing discovery rates, a focus on brownfield exploration rather than greenfield operations, difficulty raising equity, and a shift to offshore projects.

Western Areas finance director David Southam argued that policy and regulation changes which hinders the flow of overseas investment and exploration spending which also provides flow on benefits to mining service companies, was not good for the sector.

"Exploration companies are the lifeblood of the mining industry, and if you look at the statistics it's been steadily declining over the last few years," he said.

"So anything that hinders (exploration) is not good. It's the nursery of the industry and the nursery is getting hit. I'm sure there'll be a lot of argy-bargy during consultation."

Ernst & Young's Oceania mining and metals leader Scott Grimley explained that by removing immediate deductions for an incoming buyer, their after-tax returns would take a hit.

"The knock-on impact of this will be for purchasers to lower the prices they pay for exploration projects, reducing the return on the exploration investment that explorers receive when selling outright," he said.

"This will result in risk capital for exploration moving to other countries with more favourable regimes for exploration."

The new tax measures are set to affect future investment decisions in the mining sector, Pitcher Partners partner Leon Mok said the move would devalue assets being explored by junior miners.

"If you are going to devalue a product, it's not only the buyer that suffers but the seller," he said.

"It's the junior explorer that suffers because the major miner might not value this information as much any more.

"Mining is a marginal game . . . you are basically discounting the product that the junior explorers are looking to sell."

A recent Grant Thornton report published in November found juniors and explorers 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.

At the time the company’s national head of corporate finance Paul Gooley said that the availability and difficulty of sourcing funding was a major challenge for the smaller miners with 68 per cent of companies’ surveyed saying they expect to raise capital in the next 12 months.

Although, amidst all doom and gloom there is opportunity, Equinox Resources co-founder Craig Williams said for juniors and explorers to go the distance it takes “dogged determination”, and persistence for acquiring finance.

And then, there’s always the TSX which has a strong legacy of supporting up and coming miners.

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