Where have all the cowboys gone? PwC on junior mining

"Hold on, don't give up" is the advice from PwC for those junior explorers and miners who have the financial strength to survive the current downturn.

Author: Lawrence Williams
Posted: Wednesday , 07 Nov 2012

LONDON (Mineweb) -

2012 has seen turmoil in the TSX-V junior mining market and for many North American juniors it's now a "matter of life or death" according to the latest survey of the sector from PwC. The top 100 TSX-V juniors in 2012 have seen a 52% decrease in debt and equity financing compared with a year earlier, and their market capitalisation has declined 43%. It's thus been a pretty torrid time for junior miners as their financing lifeblood dwindles away.

Investors too are deemed to be far more risk averse and wary of the volatile markets. They appear to be looking increasingly to get more out of their holdings with a bias towards dividend payers (virtually no juniors can provide this by their very nature - only one of the PwC Top 100 juniors pays a dividend) or to those who are coming up with creative ways to give increased exposure to high commodity prices.

And 2013 doesn't look like it's going to be much better with those with good assets being particularly prone to falling to bigger predators as cash reserves dwindle and even minimal finance remains virtually impossible to raise for some. Bought deals have fallen drastically - from 43% of all equity raised down to 29%.

Going to the market to raise money directly is particularly unattractive for most juniors given their dismal stock price performance with many trading close to their lows and hugely below the high levels achieved only a little over a year ago - particularly in the gold sector. With gold flying in mid-2011 gold stocks were riding high and when the yellow metal slipped stocks prices fell away dramatically. This also means though, that on the acquisition front those juniors which do have sufficient wherewithal to ride out the storm will be extremely loath to capitulate to a take-over without achieving substantial premiums over their current stock prices. Even those with less healthy reserves of cash will also be holding out for strong premiums - which, as PwC points out, rather defeats the upside of depressed valuations to the predator - or will be entering into ‘engaging in a robust game of chicken' as they hope markets will pick up. Gold did receive a bit of a boost yesterday and this morning from the Obama victory, but not enough to materially boost junior gold stock prices yet, but if precious metals price do move upwards between now and the end of the year there may be better things ahead.

Where the juniors with apparently good properties and projects may look for finance, though, given their optimistic expectations, and those of their shareholders likely increasingly to price seniors and mid-tiers out of the picture, will be to look overseas for survival money. Increasingly this may come from Asia, and China in particular PwC reckons. We have already been seeing this in the iron ore sector, and also in base metals as major consumers move to tie down future supplies. But this will likely spread to gold too - indeed is already beginning to do so. PwC thinks there will be an increase in ‘toehold investments' below the 10% threshold, the level at which Canadian securities legislation will label the investor as an insider. In the industrial metals PwC says we can look for an increase in investment by vertically integrated non-mining companies. These deals "are typically structured to account for less than 20% of the issued and outstanding shares of junior miners, and, when married together with a JV interest, can bring the economic investment to 50%".

Also, PwC reckons, juniors will increasingly be looking at other means of staying afloat without totally losing their independence, such as those with multiple projects divesting themselves of one or more to raise cash to enable them to forge ahead with others. They might also consider joining forces with another similarly sized miner to help increase their overall valuation and making them more likely to attract the reduced amount of finance there may be available.

The real fly-by-the-seat-of-the-pants juniors which have been floated on dubious exploration prospects, though, will find it extremely difficult to survive and we can expect to see the real ‘cowboys' out there - and mining has their fair share of them - to die away until the time of the next boom when they may miraculously resurface, perhaps ‘exploring' for the next heavily touted metal or mineral. Such is the nature of the junior market.

But, PwC Mining Leader for the Americas, John Gravelle, concludes in the report's executive summary, despite the difficult 2012 faced by virtually all junior miners, some recent IPO successes, deal activity and improving trading volumes suggest the possibility of a financing turnaround for junior miners in 2013. The advice thus is to hold on, don't give up. If the current weak financial markets can be survived the chances are that the future is much stronger as the long term fundamentals for mining continue to be strong.

While the PwC report looks only at TSX-V quoted junior explorers and miners, the general findings and conclusions will relate equally to mining sector juniors quoted elsewhere. The sector in general is certainly down, but not out, and the cream will continue to rise to the top.

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