Hundreds of mining juniors and explorers are at risk of going under before the year’s end, a new report has warned.
Ernst & Young’s annual report Business Risks Facing Mining and Metals 2013-14 says juniors and explorers are cash poor and are facing tough times as the mining sector slows down.
The report outlines capital allocation and access to finance as the biggest strategic risks facing miners.
The ABC reports some smaller explorers have just thousands of dollars left in the kitty.
But it isn’t unusual for juniors to be lacking cash; in fact it is a common trend that comes with the territory or costly exploration and feasibility work.
Mike Elliott, Ernst & Young's global mining and metals leader, said the major issue for junior miners is raising finance.
He explained a number of junior explorers are risking collapse in the second half of the year because they are struggling to attract investment through capital raisings.
Elliott said while Canadian explorers were at the highest risk of collapse, Australia’s situation isn’t much better.
"There are a preponderance of those in Western Australia, particularly in the West Perth area, which are really desperate for their next line of financing," he said.
"We talking dozens, if not hundreds, in Australia as well that would be in a critical situation," he said.
"Now, that doesn't mean to say that all of those will go into administration but in many instances they may be required to sell off their family jewels, through their best properties, in order to keep their heads above water."
Elliott said the next six to nine months are going to be critical for smaller miners unless investor confidence improves.
Analysing 350 small mining companies with a market value of $500 million or less, listed on the Australian Stock Exchange, the report found the combined market value dropped one quarter in the year to March.
But it’s the even smaller miners, worth less than $50 million who were hit the hardest, falling 43 per cent over the year.
Ernst and Young said many of these companies have less than six months operating cash left.
Globally, attracting investment was highlighted as a key issue with 60 per cent of equity issues raising less than $1 million.
Junior funding initiatives
Increasing exploration funding from government bodies is one initiative that assists juniors struggling for investment.
This week the Western Australian government announced new funding to support mineral and petroleum exploration in the state.
The latest round of Co-funded Exploration Drilling subsidies allocates almost $7.2million to more than 60 mineral and petroleum projects in WA’s underexplored regions.
The subsidies are part of WA’s Exploration Incentive Scheme (EIS), which was established four years ago to support resources exploration in the state.
“The co-funded drilling program provides incentives to drill in underexplored areas to ensure the continued economic prosperity of the State’s resources industry, particularly in the current financial environment,” Mines and Petroleum Minister Bill Marmion said.
The likes of junior superstar Sirius Resources has previously benefitted from the scheme, which contributed to the discovery of the Nova deposit.
The program provides co-funding of up to 50 per cent of direct drilling costs with caps of $150,000 for a multi-hole project, $200,000 or $400,000 for a single deep hole (depending on the target commodity), and $30,000 for prospecting projects.
Association of Mining & Exploration Companies chief executive Simon Bennison said the exploration investment is a much needed boost for the industry.
“The announcement today of new State Government funding to support the search for minerals and petroleum across Western Australia is a much needed stimulus for investment in exploration in Western Australia,” Bennison said.
He explained juniors and explorers are continuing to struggle to secure cash.
“The industry has seen a lack of investor confidence in exploration companies that has made access to equity finance almost impossible,” he said.
Australia’s exploration activity has been in continuous decline, which Bennison said is of most concern, with Greenfield exploration falling 28 per cent in the December 2012 quarter.
“This decrease in greenfield exploration has serious consequences for future Governments given greenfield exploration is responsible for finding the mines of tomorrow,” he said.