Junior resources companies are battening down for a prolonged period of tight capital flow.
Junior resources companies are battening down for a prolonged period of tight capital flow.
THE hundreds of junior miners and explorers that call West Perth home are preparing themselves for a prolonged drought in capital markets, reassessing spending and studying deals that will help them survive the toughest conditions in years.
The problems facing the junior end of the mining sector are twofold: not only are commodity prices cooling, eating into the economics of planned projects, but the dire prospects for both debt and equity markets as a result of the European crisis means there are real concerns over how junior companies will fund their proposed developments.
With the exception of a brief (and terrifying) hiatus during the GFC of 2008-09, for most of the past decade junior miners and explorers have been able to rely on equity raisings to top up their bank balances when cash starts to run low.
Of course the dilution caused by equity raisings is never ideal, but at least companies could more often than not secure fresh capital in times of need.
Speaking to a variety of junior resources companies in recent weeks, it was clear that companies – regardless of their immediate capital needs – are all preparing themselves for a prolonged period of tightness.
For some that means scaling back or pulling out of proposed exploration programs. Others are hoping to sell non-core assets as a means of securing some cash, while those lucky enough to be running profitable mines are starting to eye off dirt-cheap acquisition opportunities.
Peter Landau, who is involved with eight ASX-listed companies including oil and gas producer Range Resources and coal miner Continental Coal, told WA Business News that avoiding equity raisings was critically important right now.
While cash can still be found, those investors willing to get involved are demanding huge discounts on the stock – an outcome that penalises existing shareholders.
“In a bear market, you can get slammed. To get proper, sticky equity in this market is very, very difficult,” Mr Landau said.
In response to the current conditions, Range Resources has scaled back work at its oil and gas exploration acreage in Georgia, in Eastern Europe. Instead, the money that had originally been headed for Georgia is now being pumped into the company’s profitable operations in Trinidad.
“Two years ago we would have happily gone out and raised more money and drilled another two wells in Georgia, whereas now we’re only really doing what we have to do to hold on to the blocks and preserve the investment,” Mr Landau said.
The conditions have also prompted Mr Landau to rethink possible new deals, with the cloudy outlook making him a little gun-shy.
“Everyone is extra cautious,” he said. “We had the opportunity to do a very large deal in Mexico that potentially involved a $350 million raising. But you just don’t know what is around the corner next week or the week after, and with that in mind you’ve just got to be a little bit cautious about protecting your shareholders.”
Even for those companies fortunate enough to be sitting on cash, having completed capital raisings before the market went into its current dive, there is a need to re-evaluate spending commitments.
Good exploration results are routinely being ignored by the market, which appears much more concerned about the short-term volatility over any longer-term upside. That presents a conundrum to directors: is it worthwhile to continue investing money in exploration right now, given the market won’t take notice of any positive news anyhow?
Cash is king
Compared to many other juniors, shale gas explorer New Standard Energy is in an enviable position. It has $23 million in cash, owns $43 million worth of shares in fellow explorer Buru Energy, and has US oil and gas heavyweight ConocoPhillips as a joint venture partner on its flagship assets in Western Australia’s Canning Basin.
New Standard managing director Sam Willis knows he is one of the lucky ones, but acknowledges it is difficult to pitch what is a long-term exploration and development story to a market increasingly anxious about the here and now.
“We are cashed up with good investment in Buru, our balance sheet is in good nick. But if you are not in that place, it’s not a very friendly market at the moment and that can hold up plans significantly,” Mr Willis said.
“People have got a horizon of days and weeks, not months and years. Finding people with the right alignment and longevity of view to be able to evaluate and explore an opportunity like ours is tough.”
New Standard recently announced it had started looking for partners in its Merlinleigh shale gas project in the Carnarvon Basin, hoping to attract a deep-pocketed company that will be able to fund early stage exploration work.
In a better market, New Standard may have considered raising capital and going it alone at Merlinleigh. Instead, looking for a joint venture partner was the only real option.
Acquisition potential
Amid all the nervousness, plenty of companies are looking to turn the uncertainty into an opportunity.
Those companies with money under the belt can acquire other juniors for considerably less than they would have cost a year ago. Some targets with dwindling bank balances will find themselves compelled to enter sale negotiations due to their parlous financial position.
Deals are already happening.
Northern Star Resources, which is spinning-off plenty of cash from its successful Paulsens gold mine in WA – and is one of the few WA stocks to have completed a sizeable capital raising this year – recently struck a deal to take a 21 per cent stake in emerging WA copper play Venturex Resources for up to $11 million.
Much to the chagrin of existing Venturex shareholders, the Northern Star press release announcing the transaction highlighted that Venturex’s current market capitalisation of $40 million was down some $50 million from less than six months ago.
Building scale
Mergers and deals in a market like this are about more than just picking up bargains.
In a tight capital environment, scale can help a company stand out from the pack.
Base metals company Metals X recently announced plans to acquire the remaining shares in Westgold Resources it did not already own, a deal that will leave the enlarged entity with a market capitalisation of more than $330 million in cash and listed investments of over $100 million.
That deal has been helped along by the existing shareholding and the fact Metals X principals Peter Cook and Warren Hallam already sat on the Westgold board.
Getting deals done in the resources sector can often be a tricky and complicated process, but as an increasing number of juniors start to wonder how they will pay salaries in the coming months, the likelihood of more deals starts to rise.
Altona Mining managing director Alistair Cowden said egos regularly got in the way of otherwise logical mergers and acquisitions in the mining industry, but remained confident the current conditions could start to change that.
Altona recently started producing copper from its Outokumpu mine in Finland and is about to start talks with mining giant Xstrata about a possible deal over Altona’s undeveloped Roseby copper project in Queensland.
Mr Cowden said the current environment was the ideal time for junior companies to merge, but noted that the smaller the company, the more proprietorial people became.
“If you’re in a successful corporate deal and you lose your job as a manager, so what? There are plenty of other jobs out there. It doesn’t matter, it’s about value for shareholders,” he said.
“I find very few people are willing to think that way; most people get attached to their companies and get very worried about their jobs.”
In addition to talking to Xstrata about a deal at Roseby, Altona is keeping an eye out for other juniors that could benefit from the cash flow the company is poised to generate out of Finland.
Altona itself was formed when Vulcan Resources bought Universal Resources in the wake of the GFC, and Mr Cowden believes similar opportunities will arise in the current market.
“There’s still a lot of money out there for the right things, there’s no shortage of money,” he said.
“People are holding it a little tighter, but if you can present the right product [funding is available]. That’s the thing for these smaller companies, if you can make a much larger company you can present that to institutions and so forth.”
Still, while companies struggle to stay a steady course, for the brave investor it may be a different story. Believers in the long-term growth of China may find a bargain by seeking out groups with quality assets.
Those that were courageous enough to take the plunge during the troughs of 2008 and back the key resources stocks now find themselves up around 35 per cent on average, even after the recent pain.
