The financing environment for juniors is still very tough out there, which would argue for sticking with the juniors that have access to financing or are in production and also cash flow positive:
Trouble in paradise nowadays for mine project financing--Ecclestone
Hallgarten's Christopher Ecclestone suggests GOLD ETFs have become a lobster trap for the mining industry and mining investors, particularly in reducing the availability of funds for project financing.
Author: Dorothy Kosich
Posted: Tuesday , 03 Aug 2010
RENO, NV -
mineweb.co.za
Hallgarten mining analyst Christopher Ecclestone suggested Monday that there is "trouble in paradise" because GOLD ETFs diverted funds that might have otherwise gone to a broader universe of mining stocks.
"It has created an unworthy aristocracy of stocks, particularly in the GOLD space," he insisted.
Ecclestone also believes, "IPOs in the mining space are largely a thing of the past" because "there are too many shells and moribund miners around for anyone to bother going through the rigmarole and expense of a de novo listing at this time.
"In fact there are so many of these vehicles available that it might be five years before IPOs become a feature again," he advised.
Junior financing is tough
"Many categories of miner are well-nigh unfinanceable to the institutional or retail public these days," Ecclestone suggested. "This includes most base metals stocks (that are not copper focused) and most specialty metals stories."
"A surprising number of junior golds and silvers are also like lepers," he asserted. "Their problem comes from marginal projects that will need amounts of money to move forward that are just not imaginable in light of the insiders' lack of access to fund."
"The most they can raise is lots of under $2mn and in many cases under $500K and then the market just knows that they will be back in short-order seeking more," he added. "The drip-feed financing method is now poison in a static market."
Large-scale financings are iffy
In his analysis, Ecclestone suggests that "quite a number of mid-sized miners did raises that were disproportionate to their needs and then have husbanded cash" because they feared that things would not get better.
To compound the situation, "we do not see a flow of new money to the mining space," he noted.
GOLD, silver loans are not providing the expected boost
"One would expect that companies in the financial stretch to production would be a pretty sure bet for a VPP [volumetric production payments] arrangement or some such structure, but we hear increasingly that companies who have tried their path are abandoning it out of impatience with the protracted nature of the negotiations with the commercial banks that tend to back these deals," Ecclestone said.
"This is throwing these companies back into the financing quicksand where they have to suffer the indignities of dilution as they enter the final straight to production," he observed. "One of the disappointments here is that no one has come up with a vehicle or instrument to make these GOLD loans tradable. Instead, they can go onto the books of the banks and disappears forever."
"Thus the banks are limited to the extent that they can add long-term exposures to their balance sheets," Ecclestone added.
M&A-Cashboxes are now few and far between
In his analysis, Ecclestone advised, "The snapping up of cashboxes as a backdoor financing method has pretty much run its course. The big...are as elusive and clueless as ever, while the small...imagine that every dollar in their trove is worth $1.20."
"Curiously the cashboxes should be the initiators of the transaction because they have the whiphand and instead they are like deer in the headlights," he added.
Bought Deals
Ecclestone observed that many of the big mining transactions (those in the over $100mn raised category) in the Canadian market are done as bought deals. "However, even these are relatively scarce."
Between March 30th and July 29th, the website canadianfinancing.com showed 204 mining companies on the TSX and TSX-V that are raising money. Of these, two were cancelled, 11 amended, 76 closed and 106 proposed. "This gives a rather damning majority of transactions still in the pending category," he noted.
ETFS-a lobster trap for industry and investors?
"We are now eight years into the commodity (and most particularly metals) reflation and there has not even been something vaguely like the popular upwelling of retail interest in the mining space that there was in emerging markets in the 1990s," Ecclestone observed.
"Well, might we ask ‘Has the GOLD ETF phenomenon actually undermined the financing of mining companies in both the mid- and junior-tier of the markets?' and then ‘Has the GOLD ETF phenomenon removed oxygen from the base and specialty metals miners and prospectors?'"
Ecclestone believes the move into the precious metals ETFs "has been a relatively one-way street." He envisions a worse scenario for GOLD bugs, which "would be having the GOLD ETF shrink by a mere 20% which would tip $10bn of GOLD into the marketplace which is extraordinarily thin."
He also asserted that "the whole ETF phenomenon has made money for the ETF promoters in terms of fees but that the investment banking community have made almost nothing of it while only the Magic Circle of companies in the GDX [Market Vectors GOLD Miners ETF] and the GDXJ [Market Vectors Junior GOLD Miners ETF] have been able to push out some stock into the ferocious buying pressure from the ETFs, but everyone else in the mining community have largely been beggars at this feast."
Conclusion
"Things are tough now and mining companies that have lost their credibility might think it's the market that is tough when in fact the blame can be slated home to their own errors and misdeeds," Ecclestone advised.
"As in any Darwinian process, it's survival of the fittest and a lack of introspection on why the investing public no longer like a management might be a significant step to making it more marketable and thus more worthy of being financed," he concluded. |
