Mining Eye Q1 2014
A false dawn?
The Mining Eye continues to tumble amid a mixed picture for junior miners.
Just as we dared to hope that Q4 2013 represented the bottom of a long and torturous period of share price decline for junior miners, the Mining Eye closed Q1 2014 down a further 6% and we saw no IPOs.
However, we can take some comfort that the index appears to be range-bound and has been for some months now.
Furthermore, our sister Canadian Mining Eye index (of Toronto-listed juniors) saw a positive upswing of 13% - partly explained by the index’s high leverage (61%) to relatively strong gold and silver prices, and negligible exposure to the weak iron ore price.
By contrast, the plummeting iron ore prices weighed heavily on the AIM Mining Eye, amid a broader market correction in London due to fears surrounding its greater exposure to emerging markets.
In 2014, a mood of greater optimism in the mining industry was justified by:
- Broader confidence in the global economy
- A positive earnings season among the mining majors
- The emergence of competitive, hostile bids in the gold sector
But with many metals remaining in near-term oversupply, the uncertain outlook for metals prices remains a drag on the speed of the sector’s turnaround, particularly at the more speculative junior end of the market.
Investors continue to seek yield in a risk-managed way, from dividend-paying sectors to high yielding asset classes, such as junk bonds. While the recent “boom” in technology IPOs and share prices presented hopes of a revived appetite for speculative risk, fears that the boom will be transient and bubble-shaped are undermining those hopes.
There were some bright spots. AIM’s diamond and gemstone companies sparkled in the gloom, gaining a value-weighted 8% over the quarter on the back of strong diamond prices and positive news flow, such as news of:
- Continued high grade sampling results by Stellar Diamonds
- Record auction revenues by Gemfields
- A further £85m of project funding secured by Firestone Diamonds for its Liqhobong diamond mine in Lesotho
By contrast, the impact of a challenging 2013 for coal companies continues to be felt. Strategic Natural Resources and Continental Coal are undergoing recapitalization plans to pay creditors, and Eastcoal is disposing of its assets under the Canadian Bankruptcy and Insolvency Act.
Challenging funding conditions persist
Accessing non-dilutive forms of capital remains a top priority and ongoing challenge for juniors. Once again, we saw some sizeable capital raises (debt and equity) by a handful of companies in the sector.
But the marginal quarterly increase in proceeds raised from follow-on equity issues in Q1 (to £105m from £99m) masks the stock-selective approach that investors are taking to the sector. Just four companies account for two-thirds of those proceeds, while the vast majority of juniors continue to rely on dilutive micro share issues and standby equity agreements.
Consequently, joint venturing and tactical partnerships remain a strategic imperative – to share costs and risks, bolster cash reserves, and even to stay afloat.
But with many majors turning their attention from exploration to production efficiencies, traditional partners may be harder to come by, and “non-traditional” state-backed partners potentially more complex to work with. Goldstone Resources and Altona Energy are among those seeking new partners this quarter following the decision of joint venture partners to exit their investments.
Capital and cost management
In the challenging environment, the process of cost saving and capital management is not necessarily quick or easily achieved – efforts around the following remain ongoing:
- Capital recycling: divestment or farm-out of non-core projects to release cash
- Cost-cutting: termination of secondary listings in non-core markets
- Cash saving: e.g., “drilling for equity” agreements with service providers
Necessity breeds creativity too. Amur Minerals Corp entered into an agreement with Aeroscraft Corp over potential use of its innovative heavy lift airship vehicles at its Kun Manie copper/nickel project in far east Russia. The agreement could eliminate over $140m of road construction costs, and provide Aeroscraft with a launch partner for its ML868 fleet.
We expect junior miners to play a leading role in driving technologically innovative partnerships, given their unique technical challenges (operating in geographically and logistically remote locations) and unremitting need to curb high capital costs.
The expectation of continued near-term price weakness in many metals implies limited likelihood of a broad-based recovery in junior mining share prices or capital availability in 2014. Challenging market conditions are likely to persist for the early-stage majority.
The improved sentiment seen in 2014 is reserved for the industry’s major and mid-tier producers. An important but relative minority of promising but advanced juniors will need to look to strategic partners and innovative financing solutions to fund growth and optimize capital expenditure.
We expect to see the much-anticipated deployment of expert-backed private capital in 20141, with such companies being the likely recipients of value-seeking, patient capital.
Despite subdued global M&A volumes in the sector in Q1 2014, the emergence of hostile bids underlines the logic of consolidation, particularly in the gold sector, and growing confidence to do deals.
China continues to show its interest in the sector – not least the bid by China Minmetals for the Las Bambas project, but also at the junior level, including Zhongrun International Mining in Vatukoula Gold Mines; China CAMC Engineering and SEPCO Electric Power Construction in Oracle Coalfields; and China Sonangol International in Bellzone Mining.
Juniors will be reluctant to sell while share prices remain depressed, but acquisition or consolidation may be the only realistic growth or exit option for many.
1 Visit out report, “Mergers, acquisitions and capital raising in mining and metals: 2014 outlook, 2013 review” for our views on this topic
Mining Eye performance relative to peers (last 12 months)
Source: EY, Thomson Datastream
Commodity weighting of Mining Eye
Source: EY, Thomson Datastream. By market value as at 31 March 2014
Net performance of commodity and share prices over Q1 2014
Source: EY, Thomson Datastream. Represents AIM-listed mining companies by primary commodity focus; weighted by market value