Juniors' last dance?

Many junior explorers face the prospect of having to refinance within the next six to 12 months in a market that has been horrible to them for much of the year and their share prices. Investors are few and far between as equity has dried up, and where it is available, it is expensive in terms of dilution and the need to offer (accept) a full three-year or five-year warrant.

Two or three years ago, the financing window was wide open, and many companies could raise large amounts of equity. Consequently, a lot of exploration work has been completed, and most companies have considerably advanced their projects with large drilling programmes, resource estimates and economic studies. A lack of finance now means that this activity level will now largely come to a grinding halt. Many companies are putting their drilling programmes on hold, and the number of C$1 million raises is increasing, as the market bifurcates between the haves and have-nots.

Broken

Many delegates commented that too many companies are chasing shrinking pools of capital offered by increasingly fewer investors and other market participants. Mining Journal repeatedly heard chief executives say that the current exploration model is broken, and that exploration should be a private company activity.

"We need to lose the bottom part of the Lassonde Curve and only go public once we have defined a resource or are looking to develop," the chief executive of one junior told Mining Journal.

The Lassonde Curve traces the lifecycle of a project from discovery to production on the X-axis and the increase in valuation on the Y-axis. As public companies, exploration companies annually pay hundreds of thousands of dollars in listing, audit and legal fees, plus hundreds of thousands more in marketing and promotion. The amount invested in exploration can be surprisingly small.

Attending the PMS, for example, cost US$12,000 for the entrance fee, and for many companies, $10,000 or more in travel, hotel and other costs, ostensibly to talk to people who have no desire or ability to invest in them in the current climate. Perhaps $3-4 million of shareholder funds were spent attending the event, which is currently impossible to replace.

However, the question of who would finance junior exploration would remain.

Another junior chief executive suggested the issue is more the structure of the financial markets, with the observation that Australian juniors are doing much better than their Canadian peers. "Canadian regulators have allowed the five big banks to zap speculation out of the market by forcing investment advisors to buy index-hugging funds and disincentivising anything else," the chief executive told Mining Journal. 

Developers

Companies that have successfully advanced their projects to the development stage also face a conundrum. Under the traditional debt:equity project finance model, companies seek to raise 50-70% of the initial capital to build a mine from debt with the remainder from equity. The assumption that they can raise the 30-50% equity component is not currently valid. "We can write checks all day long [for construction financing], but we can't because the counterparties cannot raise their equity component," a London-based lender told Mining Journal.

The low valuations of the junior developers mean it could be a great time for producers to buy assets and restock their development pipelines. But even that is not as simple as it sounds.

Even multi-asset producers with healthy cash balances face challenging times when deciding their capital allocation. Does it make more sense to build their organic pipeline of projects or take advantage of the value that can be found by buying assets?

"There are some really good valuations out there in the juniors, but how do we best allocate our cash, building our assets or taking full or partial ownership in other assets?" Endeavour Silver chief executive Dan Dickson told Mining Journal.

For Endeavour, that problem is perhaps one for the future, given that it has its Terronera build to complete over the next 15 months. "We think our development pipeline is the best in the space. We want to add another asset, but where we are, it is moot for us for the next six to nine months. We want to get to 50-60% complete on the build first, and when we start seeing a rerate in our share price, maybe we can acquire another cash-flowing asset with our paper," said Dickson.

"We have to look to where we get the best return for the capital we deploy. It may be buying someone else, it may be building our next project, it may be doing none of these and making incremental improvements at our existing mines. We are looking at acquiring other assets, but even if we find the best asset at the best price and it is really accretive, we could get crucified because we would take on a commitment to fund something, and the market would look at that as another drain on our cash. People are looking for the negative rather than the positive," Darren Hall, chief executive of Calibre Mining, told Mining Journal.

At current valuations, even those juniors lucky enough to elicit a bid from a bigger company could result in shareholder disappointment. "For many companies, even if they got a 100% premium, it would be a take under, not a take over for investors [who would still be underwater on their investment]," David Erfle of the Junior Miner Junky newsletter told Mining Journal.

Added to this is that valuation thoughts are anchored in the past for many. "There is too much hubris. Everyone believes their child is a savant. People won't take a 30% premium. The reality is the value of a project is what market is willing to pay," said Hall.

Streamers

One group looking to benefit from the current market malaise are the royalty and streaming companies, which are sitting on mounds of capital to deploy. With junior explorer management teams generally pathologically averse to diluting their shareholders with equity financings at low share prices, some are turning to selling royalties and streams on their projects to reduce equity dilution.

This short-term cash palliative can bring very unwelcome consequences. "Gold producers hate royalties and things that encumber an asset. Royalties are kryptonite to producers. Producers can fix a poor geological model or other technical shortcomings, but fixing a royalty or a stream is virtually impossible. Seeing a royalty means we cross a target off our list," a business development manager for a major gold producer told Mining Journal.

Never one to miss a beat, the royalty and streaming companies are starting to offer full-service financing packages. "Streamers are starting to offer the debt and equity components for project development, with the caveat that you have to take a stream or royalty too," a project developer told Mining Journal.

Some are going further than that. "A streamer offered to take a 9.9% equity stake in our company in exchange for a right of first offer if we ever decide to put a royalty on our project," the chief executive of a strategic minerals explorer told Mining Journal.

Royalties have always been a divisive financing option, and with financial desperation pushing more juniors to consider them and potentially shutting the door on producer interest in their properties, some say stomaching dilution is a better option. "Dilution is the solution!" a Toronto financier told Mining Journal.

Silver lining

The silver lining for the juniors may be that the producers are depleting their resources and will need to replenish through acquisition sooner or later. Justin Reid, chief executive of Troilus Gold, said a production dip is forecast in the 2026-2027 period. "There is a huge gap coming in the production profile, so producers are looking hard at companies that can get into production within the next couple of years," he told Mining Journal.

With Troilus and its Trolius project in Quebec being one of the projects with a line of sight on entering production in the coming years, Reid, said he has had meetings with many different producers. However, rather than the instant gratification of a cash buyout at a premium, low share prices mean all stock transactions may be the way forward, with junior shareholders exchanging their stock for a producer with greater growth potential and getting their reward that way. "You want stock, not cash at the moment so that you can ride up any potential increase in the buyers' share price," he said.