Struggling to survive the flow-through `hangover’ (June 18, 1990)

The boom years over, junior mining companies must now try to survive through the lean years, when private investors tend to play a much larger role in their continued health. No longer able to count on the easy flow-through funding of the late 1980s to fund their exploration programs, juniors must look elsewhere, hoping for a windfall but generally biding their time until precious and base metals once again grab the investor’s attention. What advice might a junior consider while it contemplates its future?

“Wait,” Toronto broker Brian Davidson said. “This is a difficult period. Flow-through hangover is taking place; the price of gold is down.”

Davidson, who as an investment dealer has experienced over the years the peaks and valleys of the mining industry, also added that equity markets and high interest rates are providing little in the way of assistance.

Compounding the problem is the securities business itself, Davidson continued. “There is a general disorganization of the role brokers play,” he said. The business is in a transitional period, he explained; brokerage houses are merging and reorganizing to ensure their own survival.

Flow-through, which fuelled the Canadian mining exploration binges of 1987 and 1988, appears to be a pale reflection of its former self. The financing scheme, which at one time allowed investors a tax writeoff as high as 166/9bh/ but now offers “only” a dollar-for-dollar deduction, lost its extra enticement earlier this year when the federal government chopped the Canadian Exploration Incentive Program (CEIP).

Under CEIP, which was administered by the federal government and which replaced an earned depletion allowance scheme providing for a tax writeoff above the dollar- for-dollar deduction, grants were made available to the juniors, which then passed the funding on to the investor in the form of a deduction or kept it itself, or split it with the investor.

It is estimated about $950 million of flow-through financing was raised in 1987 for junior-mining exploration in Canada, and $850 million in 1988. For 1989 it is estimated about half of the 1988 total was raised.

To appreciate the delicate state of today’s markets, one has only to look at the price of gold, which at presstime was hovering in the US$370-per-oz. range. The precious metal last saw $500 at the end of 1987. A rally in early February of this year propelled gold towards $425.

In London, gold averaged $382 in 1989, $437 in 1988 and $446 in 1987.

Securities firm Deacon Barclays de Zoete Wedd recently commented on the rising inflation trend which, along with the increasing liquidity of the U.S. dollar, augurs well for the gold price, it says.

“Indeed, the most recent correction (late March) in the price of gold makes this opportunity far more attractive since we anticipate a rebound upwards in gold prices through $400 and likely above 1989 highs,” writes the firm in a second- quarter report.

“The upside will be limited by the stability of the U.S. dollar during 1990 but a possible spike to $500 is not out of the realm of possibility.”

The weakness of the market is evident in the recent move by Gulf Canada Resources to take Asamera Minerals (TSE) off the selling block. Asamera Chairman Charles Shultz said attempts to sell Asamera’s mineral assets were being halted “until the gold price recovers and the market recognizes the true value of the assets.” Asamera owns 51% of the producing Cannon gold mine in Washington state.

Willing to walk where others fear to tread is Curragh Resources (TSE). The private lead-zinc producer which operates the Faro mine in the Yukon tried to bolster its finances and clear up its debt through a public share offering. It completed an offering of 5 million shares at $11.875 per share; the company initially hoped to sell 9 million shares at a higher price. Earlier this year, Curragh attempted to float a “junk bond” issue worth $190 million in the United States through the now bankrupt securites firm Drexel Burnham Lambert.

In northwestern Quebec near Val d’Or, poor market conditions and a difficult financing climate were given as the reasons for the cancellation of an option deal between Geomaque Explorations (TSE) and Kingswood Explorations (ASE). Kingswood was hoping to be in a position to spend $1.2 million during a 4-year period to earn a 50% interest in the property where mineralization containing copper, zinc and gold has been encountered.

On the other side of the country, in the Northwest Territories near Yellowknife, Noranda (TSE), Hemlo Gold Mines (TSE) and Total Energold (TSE) have placed the potentially huge Tundra gold prospect on hold. The exploration project is considered uneconomic at current gold prices.

Proving there is usually an exception to the general rule are the Eskay Creek gold play of Prime Resources (VSE) and Stikine Resources (TSE) and surrounding exploration plays in the Stewart, B.C., area. The participants there are gearing up for a hot summer.

More than 20 companies could be at work in the Stewart area during this year’s warmer months, spending as much $35 million.

In the Casa Berardi region of Quebec, Societe d’Exploration Miniere Vior (ME) finds itself in a comfortable position at the Douay gold project, where encouraging drill intersections have been uncovered on the western side of the property.

President Claude St-Jacques said the 1986 joint venture contract he signed with Inco (TSE) and Cambior (TSE) gives the seniors the opportunity to finance Vior’s share of the project’s costs. In return for their financing help, the seniors receive shares in Vior (which retains a voting trust over the shares). In Inco’s case, it currently owns about 600,000 shares of Vior. “Our other properties usually go by private financing,” St-Jacques said.

Junior company Hughes Lang of Vancouver sets out its strategy in its 1989 annual report in a straightforward manner. “Management intends to minimize exploration risk by not funding grassroots exploration directly,” it says. “Accordingly, farm-out agreements will be negotiated with other companies to fund grassroots exploration of the corporation’s properties.”

Private placements remain a favored method of raising needed funds. Redstone Resources (TSE), for example, has negotiated a $3-4 million private placement involving 1.86 million shares at $2 per share. Redstone shareholder Franco-Nevada Mining (TSE) has agreed to subscribe for 1.06 million shares, which will boost its holding in Redstone to 40%. Securities firm Gordon Capital is acting as the agent for the remaining 800,000 shares.

Redstone plans to spend $3 million of the placement’s proceeds to acquire a 2% gross royalty in the Midwest uranium deposit in Saskatchewan which is being developed by four partners.

The boom years over, junior mining companies must now try to survive through the lean years, when private investors tend to play a much larger role in their continued health. No longer able to count on the easy flow-through funding of the late 1980s to fund their exploration programs, juniors must look elsewhere, hoping for a windfall but generally biding their time until precious and base metals once again grab the investor’s attention. What advice might a junior consider while it contemplates its future?

“Wait,” Toronto broker Brian Davidson said. “This is a difficult period. Flow-through hangover is taking place; the price of gold is down.”

Davidson, who as an investment dealer has experienced over the years the peaks and valleys of the mining industry, also added that equity markets and high interest rates are providing little in the way of assistance.

Compounding the problem is the securities business itself, Davidson continued. “There is a general disorganization of the role brokers play,” he said. The business is in a transitional period, he explained; brokerage houses are merging and reorganizing to ensure their own survival.

Flow-through, which fuelled the Canadian mining exploration binges of 1987 and 1988, appears to be a pale reflection of its former self. The financing scheme, which at one time allowed investors a tax writeoff as high as 166/9bh/ but now offers “only” a dollar-for-dollar deduction, lost its extra enticement earlier this year when the federal government chopped the Canadian Exploration Incentive Program (CEIP).

Under CEIP, which was administered by the federal government and which replaced an earned depletion allowance scheme providing for a tax writeoff above the dollar- for-dollar deduction, grants were made available to the juniors, which then passed the funding on to the investor in the form of a deduction or kept it itself, or split it with the investor.

It is estimated about $950 million of flow-through financing was raised in 1987 for junior-mining exploration in Canada, and $850 million in 1988. For 1989 it is estimated about half of the 1988 total was raised.

To appreciate the delicate state of today’s markets, one has only to look at the price of gold, which at presstime was hovering in the US$370-per-oz. range. The precious metal last saw $500 at the end of 1987. A rally in early February of this year propelled gold towards $425.

In London, gold averaged $382 in 1989, $437 in 1988 and $446 in 1987.

Securities firm Deacon Barclays de Zoete Wedd recently commented on the rising inflation trend which, along with the increasing liquidity of the U.S. dollar, augurs well for the gold price, it says.

“Indeed, the most recent correction (late March) in the price of gold makes this opportunity far more attractive since we anticipate a rebound upwards in gold prices through $400 and likely above 1989 highs,” writes the firm in a second- quarter report.

“The upside will be limited by the stability of the U.S. dollar during 1990 but a possible spike to $500 is not out of the realm of possibility.”

The weakness of the market is evident in the recent move by Gulf Canada Resources to take Asamera Minerals (TSE) off the selling block. Asamera Chairman Charles Shultz said attempts to sell Asamera’s mineral assets were being halted “until the gold price recovers and the market recognizes the true value of the assets.” Asamera owns 51% of the producing Cannon gold mine in Washington state.

Willing to walk where others fear to tread is Curragh Resources (TSE). The private lead-zinc producer which operates the Faro mine in the Yukon tried to bolster its finances and clear up its debt through a public share offering. It completed an offering of 5 million shares at $11.875 per share; the company initially hoped to sell 9 million shares at a higher price. Earlier this year, Curragh attempted to float a “junk bond” issue worth $190 million in the United States through the now bankrupt securites firm Drexel Burnham Lambert.

In northwestern Quebec near Val d’Or, poor market conditions and a difficult financing climate were given as the reasons for the cancellation of an option deal between Geomaque Explorations (TSE) and Kingswood Explorations (ASE). Kingswood was hoping to be in a position to spend $1.2 million during a 4-year period to earn a 50% interest in the property where mineralization containing copper, zinc and gold has been encountered.

On the other side of the country, in the Northwest Territories near Yellowknife, Noranda (TSE), Hemlo Gold Mines (TSE) and Total Energold (TSE) have placed the potentially huge Tundra gold prospect on hold. The exploration project is considered uneconomic at current gold prices.

Proving there is usually an exception to the general rule are the Eskay Creek gold play of Prime Resources (VSE) and Stikine Resources (TSE) and surrounding exploration plays in the Stewart, B.C., area. The participants there are gearing up for a hot summer.

More than 20 companies could be at work in the Stewart area during this year’s warmer months, spending as much $35 million.

In the Casa Berardi region of Quebec, Societe d’Exploration Miniere Vior (ME) finds itself in a comfortable position at the Douay gold project, where encouraging drill intersections have been uncovered on the western side of the property.

President Claude St-Jacques said the 1986 joint venture contract he signed with Inco (TSE) and Cambior (TSE) gives the seniors the opportunity to finance Vior’s share of the project’s costs. In return for their financing help, the seniors receive shares in Vior (which retains a voting trust over the shares). In Inco’s case, it currently owns about 600,000 shares of Vior. “Our other properties usually go by private financing,” St-Jacques said.

Junior company Hughes Lang of Vancouver sets out its strategy in its 1989 annual report in a straightforward manner. “Management intends to minimize exploration risk by not funding grassroots exploration directly,” it says. “Accordingly, farm-out agreements will be negotiated with other companies to fund grassroots exploration of the corporation’s properties.”

Private placements remain a favored method of raising needed funds. Redstone Resources (TSE), for example, has negotiated a $3-4 million private placement involving 1.86 million shares at $2 per share. Redstone shareholder Franco-Nevada Mining (TSE) has agreed to subscribe for 1.06 million shares, which will boost its holding in Redstone to 40%. Securities firm Gordon Capital is acting as the agent for the remaining 800,000 shares.

Redstone plans to spend $3 million of the placement’s proceeds to acquire a 2% gross royalty in the Midwest uranium deposit in Saskatchewan which is being developed by four partners.