Junior miners, small mining companies still in the exploration or early production stages of mine development, are having an increasingly hard time raising sufficient funds to get their mines into production.
With companies quickly burning through their limited capital, Bloomberg News estimates that on average, junior mining companies have only 5.7 months worth of cash on their balance sheets, down 25% from last year. Unless smaller mining companies can raise more capital, they will be unable to fund ongoing exploration projects and will have to cease operations.
Mitchell Krebs, chief executive officer of Coeur d'Alene, told Bloomberg, "You will see a lot of companies hit the wall in 2013."
That makes them tempting targets for some of the bigger, well-financed mining companies such as Coeur d'Alene Mines Corp (NYSE: CDE).
If a junior miner sitting on a strong claim gets shut out of the capital markets, a well-funded buyer can acquire the company and its claim for a song.
"Everyone seems to be running away from it now and looking at selling off assets," Newmont Mining (NYSE: NEM) CEO Gary Goldberg said in a Bloomberg interview Feb. 25. "That's the time to look in the opposite direction from the herd to see what opportunities might be out there."
Why Can't Junior Miners Raise Cash?
Junior mining companies have traditionally funded themselves through some combination of equity and debt financing.
The problem with equity financing, particularly in the early stages of mine exploration and development, is that equity is usually sold at a very low price-to-NAV (net asset value) ratio, which is extremely dilutive for existing shareholders.
Debt, on the other hand, is a ticking time bomb. Banks generally don't like to lend against cash flow for periods longer than five years, according to Sandstorm Gold (TSE: SSL) CEO Nolan Watson.
The normal delays in getting a mine built and into production often bump up against the limits of a banker's patience with keeping such a risky loan on his books.
ETFs are also killing investor appetite for mining shares. You can see that in the relative underperformance of the Market Vectors Gold Miners ETF (NYSE: GDX) compared with the SPDR Gold Trust (NYSE: GLD). Since Jan. 4, 2008, GLD is up 89.95% while GDX, which used to move pretty much in tandem with the gold price, is down 22.46% over the same period.
Investing in a mining company, especially a junior, requires an investor to have a view on the underlying resource and then to sort through all of the available mining companies before making a decision.
Resource ETFs give investors the ability to invest directly in the underlying resource, a lower-risk trade that requires less due diligence, leaving mining companies starved for new money.
Streaming Alternative Financing
Streaming is an alternative method of mine financing which has gained in popularity over the past few years.
A streaming company raises capital from investors, which it uses to purchase a portion of the production from a particular mine, which is then sold to pay investors. This method of financing is more patient than debt and less dilutive than equity.
The most famous streaming company is Silver Wheaton Corp. (NYSE: SLW) but Sandstorm Gold, mentioned above, and its sister company, Sandstorm Metals & Energy (STTYF), both spin-offs from Silver Wheaton, offer investors the opportunity to buy resource streams from gold mines and other mined resources.
Sandstorm Gold's Watson believes the streaming business model will become more popular among investors while miners are not going to have much of an alternative if they want to seek funding for new exploration and development activities.
Private equity is expected to be another source of capital for junior miners as investors seek to buy cash flows from mining operations. The real issue here is whether private equity investors will be patient enough to wait the two to four years it takes before a typical mine moves from exploration to production and begins to generate cash flow.
In the meantime, junior miners are running out of cash and may well find themselves on the auction block over the next few months as mining majors cherry pick the best resources at bargain-basement prices.
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