Mining Eye

Mining Eye Q2 2013

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Down but not out

Our Mining Eye index continued its steep downward trajectory, losing 21% over Q2 2013 and 34% since the start of the year.

Mining Eye performance relative to peers (last 12 months)

Source: EY, Thomson Datastream

Continued commodity price weakness and declining investor confidence is driving funds away from mining equities. Of the 19 FTSE AIM All-Share Supersector indices, Basic Resources was the worst-performing for the second consecutive quarter.

FTSE AIM sector index movements (Q2 2013)

Source: EY, Thomson Datastream

Capital crisis

Translating this lack of confidence to the early-stage end of the industry means assuming a level of risk that the equity markets are currently unwilling and unable to value or bear.

The average market value of AIM-listed mining companies fell to £33m at the end of June 2013, compared with £136m at the Mining Eye’s peak in Q1 2011. Excluding the top 20, the average falls to just £13m. This means that for exploration or development activity, AIM’s micro-cap companies need to raise finance at significant multiples to their market value.

Unfortunately, many are struggling to raise any at all. Equity proceeds (from follow-on issues — there were no IPOs) have fallen to another record low at £57m (vs. £64m in Q1 2013 and £96m in Q2 2012), a trend reflected across global mining equity markets.

Degrees of distress

At least 10 companies in the AIM mining universe have reported signals of distress (with varying severity) over the quarter – including:

  • Assets put up for sale or on care and maintenance
  • Defaults on borrowings
  • Widespread job cuts
  • Winding up orders or outright exits from the industry

Mwana Africa and African Eagle Resources, both nickel-focused, reported difficulties raising finance due to challenging market conditions and negative sentiment attached to the weak nickel price. 

Mwana is considering strategic options for its assets, including revised mine plans to improve short-term cash flow. African Eagle will dispose of substantially all of its assets to a holding company, Blackdown Resources (ultimately owned by mining entrepreneur Nick Clarke), and will become an investing company.

Mining Eye and commodity price performance (Q2 2013)

Source: EY, Thomson Datastream

Survival strategies

However, there are some success stories and effective survival strategies at work, demonstrating that juniors are adapting within their means. 

Well-capitalized companies have made progress through proving up and de-risking discoveries. Others are pursuing all-share mergers and acquisitions to enhance their profiles on capital markets and to unlock value or create scale that neither party could realize on a standalone basis. Take a look at some examples.

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  • Bushveld Minerals proposed acquisition of Lemur Minerals: to achieve sufficient diversification and scale to attract greater analyst coverage and therefore improved liquidity and access to capital
  • Minco’s proposed merger with Buchans Minerals: consolidating ownership of the Lundberg base metals and Woodstock manganese projects in North America to enhance capital markets profile
  • Serabi Gold’s merger with Kenai Resources, which controls the Sao Chico gold deposit, a satellite to Serabi’s near-producing Palito gold mine in Brazil, to unlock the value of both projects

We also highlight some successful alternative financings that were announced or closed in the quarter.

Looking ahead: finding alternatives

Very near-term recovery looks unlikely, and we expect the challenging market conditions for juniors to continue over the second half of 2013.

Three companies exited the sector in Q2 as a result of the conditions, and are unlikely to be the last. Options for early-stage companies are extremely limited, and confidence may need to return to the majors before translating into the return of speculative risk capital for juniors.

We also see a continued role for private wealth in providing capital to the junior sector, particularly in the form of strategic investors, high-net-worth individuals and specialist financing houses. All-share consolidation among juniors is likely to continue as a means of gaining critical mass and pooling resources.

We encourage companies to:

  • Explore the full range of funding options and providers available
  • Seek impartial advice about the risks and benefits attached to each funding type and capital provider
  • Understand the various requirements and opportunities that well-capitalized mining companies, lenders and investors are seeking in the current environment  

FTSE AIM sector index movements (Q2 2013)

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Source: EY, Thomson Datastream