11/03/2014 - 09:54

Mining explorers face cash challenge

11/03/2014 - 09:54

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SPECIAL REPORT: Poor investor sentiment and low confidence have put a crunch on capital for WA’s junior miners.

Mining explorers face cash challenge
GOOD NEWS: Jon Dugdale says positive results are a necessity for junior miners such as Red Mountain Mining to attract investment. Photo: Attila Csaszar

Poor investor sentiment and low confidence have put a crunch on capital for WA’s junior miners.

There were 297 Australian Securities Exchange-listed junior mining and exploration companies with less than $1 million in the bank at the end of 2013.

The previous 12 months had been another period of poor investor appetite for exploration, exacerbated by uncertainty surrounding global and domestic financial markets, and volatility in commodities markets.

Silver was the worst performing commodity for the year, with prices for the metal falling 28 per cent.

The price of nickel wasn’t far behind, falling 22 per cent in 2013, while gold also endured a horror run, with spot prices dropping by 19 per cent.

The ASX small resources index was down 39 per cent for the year, while at the same time the All Ordinaries index rose 6 per cent.

 

So it comes as no surprise that Association of Mining and Exploration Companies chief executive Simon Bennison told Business News funding restraints remained the biggest challenge for exploration firms, which spent the greater part of last year cutting costs, rationalising staff numbers and concentrating what funds they had on flagship projects.

“With the climate we’ve been through in the last two or three years, both internationally and also on the domestic front, it has been a pretty tough environment for retail investors to see capital growth in a lot of these exploration companies,” Mr Bennison said.

“For greenfields exploration it certainly is a struggle for a lot of the companies out there.

“We’re working flat-strap trying to get changes, mainly at the federal level, to get rid of taxes like the mining tax and the carbon tax, to improve investor sentiment and confidence.

“It’s not a great climate right now.”

Mr Bennison said the sector was looking forward to July 1, when the federal government’s Exploration Development Incentive scheme comes into effect.

The scheme will allow investors to deduct a proportion of eligible exploration spending against their personal taxable income.

“The EDI will be a fantastic catalyst to improve investor sentiment and their inclination to open their wallets and take on a bit of risk,” Mr Bennison said.

“With only 12 initial public offerings for exploration companies in 2013 and only two since the start of 2014, the EDI will provide a much-needed incentive for capital to flow into the sector.”

Exploration cutbacks

With not a lot of cash in the bank, junior explorers have slashed spending on drilling activities.

The latest figures from the Australian Bureau of Statistics showed a total of $308.3 million was spent on minerals exploration by Western Australian firms in the December quarter, down from $395.8 million in the previous three months.

The total spend has been on a downward trend since the June quarter in 2012, when there was $603.2 million spend on exploration, according to the ABS.

Greenfields exploration spending in WA fell to $86.8 million in the December quarter, well down from the $148 million spent in the previous quarter and even further off the $213.5 million put towards exploration for new deposits in the June quarter in 2012.

“For some companies it is really a case of bolting the door and hanging in there on their tenements,” Mr Bennison said.

“There is no doubt, we’ve seen it in the GFC and we see it within the cycles of the resources sector, there will be a certain amount of consolidation in the industry.

“Some companies will get picked up by others and they’ll run with those assets and away we go.

“It’s not like we haven’t been in this space before, it’s just unfortunate that this time it looks like it is going to last a bit longer than the others.”

Attracting investors

A recent Grant Thornton survey of the sector found 67 per cent of companies that raised funds in 2013 experienced moderate or significant challenges in doing so, while 46 per cent of the respondents anticipated a need to raise funds within the next 12 months.

The survey also found 51 per cent of the companies that planned to tap the market in the next 12 months expected to have to provide a significant discount to entice investors to open their wallets, while 56 per cent said they would have to go offshore to expand the potential pool of investors.

Business News IQ research found there were 106 discounted capital raisings undertaken by WA-based junior mining and exploration firms in 2013, raising a total of $704.2 million.

The discounts ranged from small, such as Peel Mining’s 2 per cent discount on the previous day’s share price when it announced a $5.1 million placement in May, to significant, including Tanami Gold’s 65 per cent discount on its $65.3 million entitlements offer launched in March.

Tanami launched another entitlements offer in November, this time raising $11.75 million at a 39.4 per cent discount to its previous share price.

Other significant discounts included Swan Gold Mining’s 93.2 per cent discount on its $17.5 million placement in February, and Paladin Energy’s 30 per cent discount on its $88 million placement in August.

Patersons Securities senior research analyst Simon Tonkin said the key to attracting investor interest was providing confidence to shareholders, through management having significant shareholdings themselves and companies pushing the majority of what funds they do hold into respective projects.

Mr Tonkin said other important attractors to investors included having a clear timeframe for drilling and development, an up-to-date website with recent presentations, good fiscal controls, and solid engagement with brokers and analysts.

“You have to attract new investors by going out and doing the legwork,” Mr Tonkin said.

“You have to go and see the funds and meet investors and have a good relationship with the brokers as well.”

But perhaps the most important factor in attracting investor interest is having solid project fundamentals.

Red Mountain Mining managing director Jon Dugdale, whose company wowed the market with spectacular drilling results at its Batangas gold project in the Philippines in November, said a company needed to have positive news to impress investors.

“It needs to be the sort of news that stands out a bit in terms of grade or smaller scale higher margin project potential, which means you won’t have to raise a huge amount of money to get into production,” Mr Dugdale told Business News.

“The perception out there is that it’s difficult to raise money, so what we’ve been able to do, which is probably a good example of the sort of thing that can attract funding, is talk about high-grade results, talk about potential low production costs and potential low capital costs.

“That’s the sort of thing that’s leading to a lot of interest, and that’s the sort of project that will get finance, because you don’t have to raise a huge amount of debt, you don’t have to raise a huge amount of equity, and you don’t have to raise three or four times your market capitalisation to get something going.”

Mr Bennison agreed, saying there was still money around for good projects and good management teams with a solid track record.

“It is not a total lockdown by any stretch,” Mr Bennison said.

“Companies are just quietly going about their business, working out where they can save money and how they can do things smarter, to try and weather this current period.”

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