There’s been a lot of handwringing about the state of the junior mining sector lately, including a recent story in the Canadian business press predicting the disappearance of hundreds of Canadian companies that could stall the supply of worldwide mineral projects for years.
But the negativity is excessive. Mineral exploration has always been a market of extremes, moving from boom to bust to boom quickly and forcefully. It’s not necessarily a bad thing.
A bust like no other?
Last year, worldwide exploration budgets hit a new all-time high of $20.5 billion, according to Mineral Economics Group (MEG). Since juniors account for about half of the spending, that figure will drop precipitously this year as they struggle to raise financing for projects.
Juniors rely on robust equity markets to pay for exploration. But investors burned badly by some of the larger – supposedly more secure – producers are in no mood to speculate right now.
But consider the last bust in 2008, and many others before it, and you’ll see that the junior market often recovers as quickly as it crashes.
The sharp downturn in exploration spending in 2009 triggered by the fall out from the European debt crisis – the largest year-on-year decline since MEG started recording statistics in 1989 – reversed itself entirely in 2010 as commodity prices, especially gold, remained resilient.
All it takes is a trigger: often an uptick in metal prices, but just as likely a discovery that demonstrates the laws of risk and reward, attracting investors back to the game.
Good riddance to the chaff
During a boom, there are always unscrupulous or simply inexperienced managers who attach an exploration story to a publicly-traded shell company it order to cash in on the wave. During a bust they are the first to go when the worthlessness of their asset is exposed, strengthening the sector as a whole.
At the other end of the spectrum, strong projects with proven managers will always be able to raise money, even in a bust. Look at True Gold, which recently raised $23.5 million in a private placement for is Karma project in Burkina Faso, or Lowell Copper, headed by exploration legend David Lowell, which closed an $11.4 million financing in July for grassroots exploration in Chile.
The clock is always ticking
If you can picture the junior exploration cycle as a clock with the crash at 12 o’clock and the boom at 6 o’clock, we’re currently approaching two o’clock, when conditions can’t get much worse.
Over the next couple of hours, some juniors will disappear, others will go dormant – perhaps dropping to the NEX board of TSX-V temporarily – while some of the stronger companies will pool their resources in consolidation. Exploration spending levels will continue to decline as the remaining juniors move into cash preservation mode.
As we approach five o’clock and market conditions and/or commodity prices begin to improve, the stage will be set for cash takeovers by producing companies seeking undervalued exploration assets. Once juniors start launching IPOS on the TSX-V, we’ll know the boom is back in earnest.
Just how long the process will take in real time is impossible to gauge because the triggers can be so unpredictable and setbacks do happen.
One of the worst crashes occurred in 1997, when the Bre-X fraud seriously undermined the sector’s reputation and prompted much stricter controls on reporting exploration results (National Instrument 43-101). A declining gold price that bottomed out at US$256 per oz. in 2001 (compared to $1300 per oz. currently) prolonged the bust. Exploration spending didn’t begin to recover in earnest until 2002, but then accelerated rapidly, resulting in 677% increase from the bottom of the cycle to a new high of $13.8 billion in 2008, when we entered the next bust phase.
And every cycle has different characteristics. This time around, companies with more advanced exploration projects have an unprecedented opportunity to tap alternative sources of funding such as royalty companies, private equity firms and sovereign wealth funds. In addition, the TSX-V has indicated that it will make junior consolidations easier by allowing some to go ahead without shareholder approval.
That kind of flexibility may help accelerate the cycle. If I were a betting woman, I’d say the junior mining market would be seeing the light at the end of the tunnel by the second quarter of 2014.