Between a rock and a hard place
'No one wants to finance' Junior Miners
Peter Koven, Financial Post Published: Monday, October 06, 2008
financialpost.com
With the junior mining sector in disarray, the mood at the Toronto Resource Investment Conference over the weekend was grim and downcast.
The annual gathering of junior miners, letter writers and retail investors is normally an upbeat affair full of outrageously bullish predictions for the sector.
But at this year's show, there was a realization that many of the companies on display will not even be around next year in their current form.
"We had maybe about 2,000 juniors at the peak. I think we'll see at least a quarter to a third of them in the next six months stop being an active company," said Peter Grandich, publisher of the
Grandich Letter.
The credit squeeze has made it impossible for many junior mining companies to raise money. As a result, the ones that are running low on cash have simply stopped doing anything, and the ones that have cash are being very prudent with it.
Meanwhile, commodity prices are cooling off, hedge funds are forced to liquidate positions and costs on mining projects are soaring. The result is that share prices are plummeting as investors have no confidence that the juniors will ever be able to develop their projects.
It made it difficult for the companies at the conference to put a positive spin on things.
"No one wants to finance anything in this market. If you need financing, God help you, it's pretty brutal," said Mark Kolebaba, chief executive of
Diamonds North Resources Ltd.
Diamonds North made a potentially huge diamond discovery early this year, but it still plummeted back to penny-stock territory in the past few months like nearly all its junior counterparts.
"Last year, you couldn't get the people or the drills you wanted. This year, it's a complete turnaround. You can get the people and the drills, but you won't be able to raise money," Mr. Kolebaba said.
At the conference, there was little optimism that things will get better in the near future as the credit crunch gets worse and a global economic slowdown looms.
A popular theme at the show was the so-called "disconnect" in which commodity prices remain relatively strong, but many junior companies trade at a discount to their cash.
John Kaiser, publisher of the Kaiser Bottom Fish Online report, told an audience that a healthy "washout" is coming in the junior sector, in which the companies that survive are the ones with strong management teams and "pounds in the ground" that can be mined. This is a great buying opportunity for those companies, he said.
"All of this fear and angst that we're seeing now is pushing the supply pipeline farther into the future. And [therefore] we might see a period with metals taking off again and spiking to crazy levels," he added.
When the junior sector does recover from its current state, the consensus from the industry insiders is that it will look a lot different than it does now. While bank financing will eventually pick up again, the banks will be much more selective of which juniors they give money to than at any other point in the past five years. Company executives said more emphasis will be put on raising money from senior mining companies, strategic Asian buyers and even private equity.
"The senior companies with good cash flow should be like kids in a candy store looking for good prices and looking to consolidate," said Brian Gavin, chief executive of Franconia Minerals Corp.
Mr. Gavin added that most juniors are preparing to hunker down for anywhere from six months to two years as they conserve whatever cash they have on hand. He is confident bank financing will come back, but also said the junior mining sector will not be the first place banks turn to when they're eager to lend again.
"We're the first ones turned away from the banquet and the last ones given a knife and fork to come back," he said. |
