Q4 2012 in review
The index fell 12% over Q4, consolidating a punishing year for the junior mining sector. Risk aversion was the main trigger behind the largest annual decline (38%) since the 2008 global financial crisis.
Underscoring this was the significant underperformance of AIM's miners relative to their peer groups. The FTSE AIM All-Share (all sectors) index closed unchanged, indicating the extent of the risk attached to the resources sector (the Oil & Gas Eye index lost 7% over 2012).
Mining Eye index and FTSE AIM All-Share index performance over Q4 2012
Mining Eye index and FTSE AIM All-Share index performance, last 12 months
Furthermore, a 9% improvement in the FTSE Mining index of major miners illustrated the divergence between the performance of higher risk juniors and their established producing seniors.
Some of the index losses were also due to commodity price weakness in Q4, particularly in gold and platinum group metals, on which around 40% of the index's value is focused.
At least five companies appointed administrators, while a handful announced distressed outright disposals of mining assets.
Offsetting some of the gloom, four mining companies joined the market in Q4, looking to raise their profiles and access institutional capital – and contributing to a small uplift in the quarter's equity proceeds. However, over the year, total equity proceeds reached just £599m – the lowest annual total since 2003.
Equity fundraising across all sectors on AIM was also at its lowest since 2003, but proceeds raised by mining companies accounted for 19% and 20% of the total in Q4 and 2012, respectively, showing the continued importance of the exchange for mining stocks. Total equity proceeds raised by mining companies reached £168m in Q4, a 100% increase from Q3's low of £84m.
Mining Eye index and peers over Q4 2012
Mining Eye index and peers, last 12 months
Mining Eye index, gold, platinum and LME Index over 2012
Source: Ernst & Young, Thomson Datastream
Optimizing for future growth
A healthy mix of strategies was at work in the junior sector – at one end focused on damage limitation, and at the other on optimization and sustainable growth. These strategies were often met with frustratingly little, or even negative, share price appreciation, but were aimed at demonstrating to shareholders that boards are focused on optimizing and delivering returns. Some examples are highlighted below.
- Beacon Hill Resources announced a strategic asset review under the guidance of new Managing Director, Rowan Karstel, to reduce and phase capital expenditure on the Minas Moatize coal project.
Other companies continued to look to divestments to raise capital and prioritise limited resources for core projects.
- Stratex International completed the sale of its 30% interest in the Öksüt gold project in Turkey, securing a stronger cash position from which to develop its majority-owned projects.
Small-scale joint ventures were used as a lower-risk, lower-cost way of accelerating development of peripheral projects.
Countercyclical strategic investors, including state and private capital, continued to play a role in filling the funding gap in Q4.
Junior companies are actively looking for these investors, with a number of IPOs postponed in favour of securing long-term investment and a vote of confidence before a public listing and access to capital markets.
- Orsu Metals signed a term sheet with RK Mine Finance for up to US$25m of debt facilities for its Karchiga copper project in Kazakhstan.
- Chaarat Gold attracted interest from two major Chinese gold companies, Shandong Gold Mineral Resources Group and China Gold International Resources Corp.
- Vatukoula Gold Mines completed a strategic placement with existing shareholder Zhongrun International Mining.
- Diamondcorp attracted investment from two strategic partners, the Industrial Development Corporation of South Africa and a subsidiary of Tiffany & Co, as part of a wider debt and equity project financing package for the Lace diamond mine in South Africa.
- UK company Oracle Coalfields, which is developing a lignite mine in Pakistan, signed a memorandum of understanding with Thatta Cement Company to supply dried coal to its cement works.
Looking back over 2012...
2012 represented a value-destructive cycle for junior miners: “risk-off” investor sentiment limited the very supply of capital that enables companies to de-risk projects.
However, AIM’s junior miners showed agility and creativity in face of the funding challenge, matched by an increasingly wide range of long-term strategic investors. The outstanding capital raisings highlighted here show money is there for the right projects, but on a very selective basis, and potentially dilutive or high-cost terms.
|Company||Type|| Total proceeds |
|Focus of activity|
|African Minerals||Credit facilities; convertible bonds; strategic equity||1,800||Iron ore in Sierra Leone|
|London Mining||Equity; royalty financing||126||Iron ore in Sierra Leone|
|CoAL of Africa||Credit facilities; strategic equity||100||Coal in South Africa|
|Kirkland Lake||Gold Convertible bonds||80||Gold in Canada|
|Shanta Gold||Credit facilities; convertible bonds; equity||76||Gold in Tanzania|
|Sirius Minerals||Equity||55||Potash in the UK|
|Pan African Resources||Rights issue (acquisition funding)||51||Gold in South Africa|
|Aureus Mining||Equity||50||Gold in Liberia and Cameroon|
|Amara Mining||Credit facilities; equity||35||Gold in Burkina Faso, Sierra Leone and Côte d'Ivoire|
|Minera IRL||Equity||21||Gold in Peru and Argentina|
Source: Ernst & Young research, Intierra
2012 in numbers
|-38%||Mining Eye index net movement||(2011: -24%)|
|£7.9b||Market value of AIM mining universe at 31 December||(2011: £12.6b)|
|172||Size of AIM mining universe at 31 December||(2011: 163)|
|14||Number of new companies1||(2011: 16)|
|5||Number of companies delisting2||(2011: 14)|
|2||Number of companies delisting due to takeover||(2011: 3)|
|0||Number of companies graduating to Main Market||(2011: 3)|
|£599m||Amount of equity raised||(2011: £1.2b)|
|£1.1b||Market value of African Minerals3 at 31 December||(2011: £1.4b)|
Selected investors into the AIM mining sector in 2012
Selected investors into the AIM mining sector in 2012
...And looking ahead to 2013
We believe 2013 will bring a gradual return to growth, underpinned by improved investor confidence that may also drive a recovery in IPOs. But growth will be at a slower, steadier pace.
Growth and funding options for the industry’s more advanced juniors should increase:
- Strategic investors are increasingly looking to this segment to secure future supply and investment options.
- The majors may increasingly secure toehold positions in junior companies or their projects as options on future growth, in preference to direct exposure to the risks associated with Greenfield operations.
- Less volatility in the equity markets would help ease the valuation gap between buyer and seller expectations, increasing scope for expansionary deals and facilitating capital recycling through asset sales and spin-outs.
Cash is still king
The long-standing divide between the cash rich and cash poor is as potent now as it was in 2008 and 2009. We may see some new junior producers rewarding shareholders with dividend programmes. We also expect the well-funded to seek opportunistic acquisitions that drive efficiencies, especially on the operating cost side.
The cash poor, on the other hand, may become targets for opportunistic buyers. We also expect further attrition of the AIM mining universe, with early-stage or capital hungry companies especially vulnerable.
We expect investors to increasingly apply a “stock selection” mindset in cautious market conditions. Smaller funding requirements, linked to achievable, phased development targets, are more likely to attract investors, and less likely to result in market disappointment down the line.
Continued strategic interest in the junior sector
We expect a continued diversity and range of funding sources and structures as strategic buyers, such as state-owned entities, downstream producers, commodity traders and private capital, continue to look for opportunistic and first-mover advantage to secure long-term supply.
This is a healthy development, given the dilutive alternative of traditional equity market funding – but a thorough understanding of the range of funding structures and sources available is needed.
Diversifying sources and types of funding will help spread risk, drive efficiency and limit exposure or loss of control to a single party. Building relationships with the widest range of potential capital providers as early as possible will help secure funding at the right time and price.