Rocky road ahead for junior miners

A perfect storm has been created for junior Australian mining companies, with a number unlikely to weather the turbulence.

A bearish economic environment coupled with a lack of investor enthusiasm, as well as the decline in support for exploratory work have taken their toll on the junior miner scene.

Since 2012 there has been a steady decline in exploration drilling and budgets.

Mineral exploration spending has been falling for longer than this, however, and in terms of metres drilled has returned to levels seen around a decade ago.

The latest figures from the Australian Bureau of Statistics (ABS) for Mineral and Petroleum Exploration Australia [March quarter 2014] show a consistent decline in expenditure on mineral exploration.

The figures show there was a 25 per cent decrease in expenditure and a 35 per cent decrease in metres drilled on total deposits, as lower commodity prices hampered access to the cash needed to undertake exploration projects.

This figure continued the downwards trajectory with data released in September showing seasonally adjusted spending for the June quarter was down 7.5 per cent to $444 million. Spending has not tracked so low since December 2006.

The trend estimates for metres drilled fell 4.9 per cent in the June quarter 2014, and the current quarter estimate is 19.5 per cent lower than the June quarter 2013 estimate.

The seasonally adjusted estimate for metres drilled fell 1.4 per cent in the June quarter 2014.

Unfortunately it is the juniors who are bearing much of the brunt of these continued slumps.

According to Grant Thornton’s latest junior mining and exploration (JUMEX) report, the situation is not likely to change soon.

Grant Thornton Australia’s national head of energy and resources Simon Gray explained: “FY14 was yet another tough year for JUMEX companies, with extremely tight capital markets, volatile commodity prices and tumbling share prices.”

“The duration and extent of these conditions has wide ranging implications for companies and the industry as a whole.

“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.

“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.

Breaking point

According to the Grant Thornton report there were ten major findings uncovered in the recent survey – funding constraints are reaching a crisis point; ongoing commodity price volatility; persistent regulatory challenges; an improved investor interest; the building of a discovery pipeline; capital raising needs; ongoing market constraints; improved M&A outlook: unlikely to see quick improvements; continually depressed employment conditions.

For the third year running the lack of equity capital has been listed as the number one constraint for business.

“As a result of challenging fund raising conditions 60 per cent of respondents [to the Grant Thornton survey] experienced working capital constraints during FY14,” the report explained.

“The implications of this are numerous, including project delays, limitations on exploration activities, reductions in staff numbers and salaries, with management taking an extreme focus on cash balances and spend at the expense of value adding activities.”

However there are early signs of improvement with 37 per cent of respondents surveyed seeing investor interest return.

But this is somewhat incapacitated by a difficult capital market, which has seen an increase in the percentage of companies running a low cash balance for the third year in a row.

Approximately 79 per cent of companies that raised funds during this year experienced moderate or significant challenges in doing so, Grant Thornton reported.

The difficulty of the situation has been compounded by the fact 79 per cent of JUMEX companies surveyed anticipating a need to raise funds within 12 months.

But JUMEX companies are already finding this difficult, with around 60 per cent of respondents noting working capital constraints.

This is poor news for the industry as one respondent outlined their plan to manage these constraints, which have become a trend in the industry.

These include “retrenchments, salary cuts, disposal of non-core assets, existing from joint ventures, sales of assets, office relocation, reduction of out-sourced services, and increasing workload for remaining personnel.”

This planned reduction in manpower is already starting to bite, with overall employment slated to rise 7.2 per cent to November 2018, while mining itself is forecast to decline 4.5 per cent in the same period.

Light at the end of the tunnel

However it is not all doom and gloom for juniors.

One respondent to the survey stated “it feels as though we have seen the bottom [of the cycle] but expect recovery in investor sentiment to be gradual and erratic”.

“We are very encouraged to see a range of signs that the bottom of the cycle may have passed,” Gray said.

The repeal of the Mineral Resources Rent Tax and the Carbon Tax “will remove some of the uncertainty prevailing over the industry for the past four years”.

The ongoing issues of commodity prices is already looking brighter, with 72 per cent off those surveyed optimistic that the situation will improve, anticipating an increase to their commodity prices of their key resource over the next 12 months.

This is helping some investor confidence return to the sector.

Association of Mining and Exploration Companies (AMEC) chief executive Simon Bennison has welcomed the Federal Government’s Exploration Development Incentive (EDI), stating it will aid the recovery of the exploration sector.

“The EDI is the first of its kind in Australia and is therefore a starting point, working towards replicating the success of the Canadian flow through shares model,” he said.

Earlier this year, during the 2014 Prospects and Developers Association of Canada conference, juniors were highlighted as still prospective from an investment perspective, but that it was unrelated to the metal prices as “investors can no longer expect mining companies to get any significant help from metal prices”.

However, much of it relied on whether the company could make it through the feasibility stage without a cost blow-out; if it approached its deposit in an innovative manner; and if it had more than one strategy in play at the same time.

ANZ head of Australian economics, corporate and commercial Justin Fabo added that “commodity markets have entered the second half of 2014 on a mildly positive notice.”

“But it’s likely to be a far more gradual recovery than in the past, as it will be tempered by lower liquidity and a stronger US dollar as the US Federal Reserve edges closer to raising interest rates,” he said.

However, Gray argued that “whilst the years ahead will continue to be very difficult for many JUMEX companies, for those companies with attractive projects and some cash, investor interest levels may well pick up during the course of the year”.

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