|Financing a challenge for junior miners |
Wed Mar 28, 2012 5:24pm EDT
* Only top-flight projects a good bet for financing
* Equity financings dry up
* M&A sluggish
* Projects face long road to production
By Cameron French
TORONTO, March 28 (Reuters) - Despite steady commodity prices, financing remains a challenge for junior miners, and a sluggish M&A environment means many projects face a long road to development, a financing panel told the Reuters Global Mining and Metals Summit.
While high-grade projects in stable jurisdictions are still a good bet to find money, lower-grade projects that would have been a slam-dunk just a few years ago are facing a grim market.
"From my perspective it's virtually non-existent," Krisztian Toth, a mining M&A lawyer at Fasken Martineau, said of the potential for equity financing, traditionally the go-to way to cash up a junior explorer.
While gold and copper prices are at historically high levels, junior mining stocks have lagged and traded in sluggish volumes that deter investors who may want to unload shares at a later date.
Indeed, mining stocks in general have been on the defensive of late.
The mining-heavy S&P/TSX materials index, home to companies such as Barrick Gold and Teck Resources, has fallen 9 percent in March, compared with a 2 percent decline of the broader S&P/TSX composite index .
"That causes a lot of these junior explorers to hesitate when it comes to raising additional monies, because their valuations are so low and they don't want the dilution," said Michael White, chief executive of junior-focused IBK Capital.
The cheap valuations would normally be expected to lure senior miners looking to fill up their project pipeline.
But larger players have been picky of late, which experts said is partly due to the fact that many have full project pipelines and worry about cost overruns at new projects.
Banks, meanwhile, have all but disappeared from the junior market, due largely to fallout from the European debt crisis, experts say.
"Since the global financial crisis, the number of project lenders in the mining industry dropped to where you can count them on your fingers. What's happening now is all the European banks now have just dropped off in the last year," said David Harquail, chief executive of royalty company Franco-Nevada .
Harquail says that, with few alternatives, junior miners have flooded his company looking for financing options.
While the situation is not as dire as 2009, when some small players went belly-up due to the combination of a commodity crisis and a lack of credit, the lack of funding means many juniors taking the step from exploration property to construction project will face delays, which could eventually squeeze metals supply.
However, with long-term demand for gold and base metals not likely to dry up, junior players can still reward a patient investor, said Michael Boyd, a mining M&A banker at CIBC.
"It is creating an environment now where arguably it's a buyers market just in terms of the valuations have been crushed down so low," he said.