Mining Eye

Mining Eye Q1 2013

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Mining Eye has changed!

In line with feedback from our readers, we are now moving to a shorter online format.

This means we can now provide you with monthly updates of our index performance, fundraising and IPO trends, along with a quarterly brief on the world of junior mining on AIM.

We look forward to your comments and feedback.

Breaking records – for all the wrong reasons

The Mining Eye index plunged deeper into its fourth consecutive quarter of decline, closing Q1 2013 down 16%, and the past 12 months down 50%.

Mining Eye performance relative to peers (last 12 months)

Source: EY, Thomson Datastream

This represented a significant underperformance of commodity prices and non-mining equities, with a similar story seen across the Australian and Toronto exchanges.

AIM’s Basic Resources Index was the worst-performing of all AIM sectors over the first quarter, and by a significant margin. All other sectors, except one, saw an appreciation over the quarter.

Mining Eye and commodity price performance (Q1 2013)

Source: EY, Thomson Datastream

The speculative, pre-production investment model is not attractive to retail investors in the current uncertainty over the direction of metals prices. Risk is difficult to evaluate, while counter-cyclical investment requires a long-term return horizon.

FTSE AIM sector index movements (Q1 2013)

Source: EY, Thomson Datastream

This perpetuates the vicious cycle of capital constraint. The inability to access capital means an inability to fund development through to the next trigger of share price upside that one would expect in a normal exploration cycle.

Furthermore, positive drilling results and discoveries are no longer enough to drive share price increases, making the sale of new shares to fund further drilling unattractive.

Underlining this is the absence of mining IPOs on AIM in Q1 2013. This is matched by Toronto’s exchanges, although a couple of small floats made it through to the TSX-Venture Exchange in April.

Equity fundraising by AIM’s juniors reached another record low at just £64m (US$98m) - the lowest quarterly amount since we began coverage in 2004. 

So, not for the first time, it’s all about cash in 2013.

Those that generate cash are advancing their projects and even paying dividends. A number of sizeable equity and debt fundraisings in the pipeline illustrate continued support from long-term, strategic investors. But this backing is reserved for those with established, advanced projects and proven management teams.

Those that are raising cash must do so wisely. Alternative funding sources are emerging in the absence of traditional equity. The rise in standby equity agreements in the AIM market is no coincidence. A question mark resides over the short- and long-term costs of the funding choices being made at this point in the cycle. However limited the options become, immediate and future costs and benefits should always be carefully considered. 

Those that have little cash must make it last. Cost optimization and reallocation of capital are paramount. AIM’s mining companies are doing this from varying positions of distress:

  • Reducing executive cash remuneration in exchange for share options
  • Issuing shares in lieu of service fees
  • Delisting from secondary exchanges, to reduce listing maintenance costs that don’t stack up in an illiquid trading environment
  • Disposing of exploration assets for cash
  • Disposing of exploration assets for share options, to eliminate capex costs
  • Farm-outs and joint ventures (JVs), where the farmee or JV partner funds the upfront development costs
  • Fast-tracking low-cost early routes to production, such as direct shipping ore and metals processing
  • Scaling back the scope of development and expansion plans – reducing upfront capital requirements and speeding up lead-times to production

The challenge ahead: know your options

Access to capital will undoubtedly remain the key challenge for the junior mining sector in the year ahead. Marginal projects are unlikely to be funded, and without another bull run on commodities to invigorate risk appetite for the sector, we will see a flow of delistings from the junior mining exchanges.

The key challenge for companies will be to remain focused on minimizing costs and maximizing fundraising opportunities. This requires a thorough understanding of the range of options available, and the use of proper conduits to identify and connect with capital providers.

Mining Eye performance relative to peers (last 12 months)

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Source: EY, Thomson Datastream

Mining Eye and commodity price performance (Q1 2013)

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Source: EY, Thomson Datastream

FTSE AIM sector index movements (Q1 2013)

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Source: EY, Thomson Datastream