Juniors weather storm in rough markets: PwC

It’s been a rough two years for junior mining companies globally, with a steep drop in commodity prices accompanying an uneven recovery in the world’s industrial economies, and a serious drop in investor confidence. Canadian miners have also faced political uncertainty abroad and suffered from a rash of writedowns, yet the expected culling of small-cap companies — often predicted over the past 24 months — appears to be less pronounced than expected.

According to PricewaterhouseCoopers’ (PwC) annualjunior mine report, one-fifth of its top-100 juniors are no longer listed on the TSX Venture Exchange compared to a year ago. Research found that 82 of the companies carried over from PwC’s 2012 list, while seven graduated to the Toronto Stock Exchange, and 10 were acquired or merged with another company.

Though many juniors have survived, it’s uncertain how long these companies can hang on. PwC found that the aggregate market capitalization of its top 100 fell 44% compared to last year, and now sits at $6.5 billion. Over the past two years PwC’s reported aggregate market cap has fallen by over 68% from $20.6 billion.

Capital positions have also been on the decline, despite cost-saving measures. Cash and short-term investments held by PwC’s top 100 dropped by $700 million year-on-year to $1.2 billion. Companies have predictably preserved cash, which resulted in a 15% drop in aggregate capital expenditures. The largest cut came from junior explorers, which saw overall capex drop by 28%, or $133 million this year.

“The confidence crisis is an issue across the sector, but it’s the juniors that are being hardest hit,” PwC’s global mining leader John Gravelle says in the report. “When the recovery does come, investors will most likely put their money into senior producers first, given their strong balance sheets and proven production and profit-making capabilities.”

Financial markets have become increasingly difficult for juniors. PwC’s top 100 raised $795 million via equity placements in 2013, which was down from US$1.6 billion a year ago. Overall, cash generated by financing activities fell by 34% year-on-year, which follows a 52% drop from 2011 to 2012.

The industry’s growth has also stalled, with mining-sector initial public offerings (IPOs) on the Venture falling by more than half over the past three years. There were 24 IPOs in 2013, with 19 taking place between July 2012 and December 2012. Back in 2011 there were 52 mining-related IPOs.

And weak equity markets — along with falling cash reserves — have fuelled a drop in worldwide exploration spending, as well as a shift in where that money is being invested. A report by U.S.-based research firm SNL Financial found that global non-ferrous exploration allocations fell by 29% in 2013, dropping to $15.2 billion from $21.5 billion in 2012.

Allocations to the top-10 countries accounted for almost two-thirds of the worldwide exploration budget in 2013. SNL’s top-10 investment destinations, in order, include: Canada, Australia, the U.S., Mexico, Chile, Russia, Peru, China, Brazil and newcomer the Democratic Republic of the Congo.

Canada has been the top destination for mining investment since assuming the title from Australia in 2002, but it experienced “by far the largest dollar decline in allocations,” according to SNL’s report. Canada’s share of the global exploration budget sits at just over 13%, which is its lowest level since 1999, and only $25 million ahead of Australia.

Many Venture-listed companies have survived over the past year, but it is becoming increasingly murkier as to when the industry can expect relief.

Though many larger-cap producers have survived large-scale writedowns with cash intact, it does not look like the junior sphere can expect much from mergers and acquisitions (M&A) over the short term.

In its mid-year Global Mining Deals report, PwC found that M&A activity across the global mining sector had fallen 31% over the first half of 2013, when compared to the same period in 2012. Between January and June deal volume was down 70% year-on-year to US$22.9 billion, despite buying opportunities fuelled by a 25% fall in equity valuations across the mining sector during the period.

PwC does note, however, a changing landscape in terms of M&A structure, where traditional takeovers are replaced by joint ventures, spinoffs and company stakes bought by sovereign wealth funds.

There has been a trio of events in the financial industry that could offer juniors flexibility over the next year.

In August the Venture announced it wouldn’t need shareholder approval for most share consolidations. Approval will be required when an issuer proposes to roll back its shares at a greater than 10-to-1 ratio. The initiative is one of many rule changes aimed at helping small-cap companies, including: lower warrant and option pricing, and a 5¢ reduction in minimum IPO prices to 10¢.

Another development was announced in October, when Dundee Corp.’s president and CEO Ned Goodman spearheaded an effort to buy a 33% stake in the Canadian National Stock Exchange (CNSX). Goodman labelled the Venture a “bank cartel,” and pledged to transform the CNSX into an alternative.

Private equity could also gain popularity in the mining space. PwC notes that private-equity outfits — including Blackstone Group, Apollo Global Management and the Carlyle Group — are taking a “particular hard look at mining assets.”

Though private groups have focused on more advanced-stage properties and mines, there is also sentiment that attention may shift to promising exploration-stage projects that could carry value when markets finally recover. Private investments have come in the form of equity placements or full-blown takeover offers.

The private-equity wave may have started last year, when Appian Natural Resources Fund and Liberty Metals & Mining made a $20-million equity investment in Colombia-focused explorer Red Eagle Mining (TSXV: RD). Since then, Liberty Metals made another $23.5-million investment in Africa-focused True Gold Mining (TSXV: TGM; US-OTC: RVREF), while Avanti Mining (TSXV: AVT) closed a $40-million pre-construction loan with private-equity firm Resource Capital Funds.

“It is surprising how few companies have actually gone under. However things may change in 2014, given the cash position of many juniors,” PwC partner James Lusby says in the company’s junior report. “We’ve seen companies cut costs over the past 12 months. If they have to survive another 12 months, they may be forced to merge with an equal, get bought out or delist.”