Ten executives of junior resource companies sitting around a boardroom table should seemingly have little reason to be upbeat. The FTSE Aim Basic Resources Index, which tracks shares of junior mining companies on the Alternative Investment Market, has fallen 32 per cent in the year to date. The FTSE Aim Oil & Gas Index, which tracks junior oil and gas explorers, is down 4 per cent in the year to date but is similarly off 33 per cent from its highs in mid-February.
Yet on this chilly December morning, gathered together by advisory group Strand Hanson and the Investors Chronicle to talk about the state of the resource world, most of the executives remain hopeful about the next few years. China is beginning to show signs of a return to rapid growth; the United States' economy, meanwhile - still the biggest in the world - should benefit sooner or later from new supplies of cheap domestic energy. Mineral exploration is almost always a high-stakes game with slim odds so, while uncertainty abounds, it helps that most people in the industry are optimists by nature.
Still, the general mood around the table is a far cry from the invigorating enthusiasm of late 2009, 2010 and early 2011 - when institutional and retail money flowed freely and a rising tide buoyed all boats. Risk capital has all but dried up this year and many companies are beginning to feel the pinch.
Strand Hanson's chief executive, Simon Raggett, tested the sentiment around the room by asking for everyone's views on finding new capital. All agreed that money continues to flow into resource ventures - just at a trickle of its former pace. "If you've got a good story, an exceptional story, then yes, there's capital. But it has to be quite out of the ordinary," says Bill Humphries, managing director of Patagonia Gold, an emerging gold producer focused on Argentina.
As a special Investors Chronicle report on the finances of junior mining companies recently concluded, a miserable 24 per cent of Aim-listed explorers had less than £100,000 in working capital as of their last reported quarter.
"I don't see any light at the end of the tunnel for the companies that haven't got money," explains Mr Humphries. "I've seen these waves before. We will have a thinning out of companies. It's getting so bad some companies are coming to us offering properties for $50,000 that would have cost us $1m a year ago."
Patrick Cross, non-executive chairman of Empyrean Energy and Mercom Oil Sands, agrees. "I don't think a lot of money is going to be freed up next year. People will still be worried about uncertainty. But you have to remember 2013 is a very short period of time."
Commodity prices and the Supercycle
History has demonstrated that the natural resources sector is cyclical and most executives of listed resource companies have experienced their fair share of booms and busts. The past 10 years has been no exception, with China driving exceptional demand for raw materials as it pushed to build new infrastructure at breakneck speed. Yet new political leaders took command of the country in November and questions are being raised over the type of growth China will experience from here.
"It's not so much whether China continues to grow at 7 or 8 per cent," says Martin French, non-executive director of North River Resources. "It's whether China grows at 7 or 8 per cent via infrastructure spending. I find it very confusing," he adds, "because I listen to all these China experts and they all seem to completely contradict each other. Some will tell you China is going to build another 15 metro systems and others will tell you the whole place is massively overbuilt. No one seems to be able to answer the question."
The consensus in the boardroom was that China, the US and other emerging economies will continue to drive commodity prices higher over the long term, but we may have to suffer through a few 'neutral' years first.
Shanghai surprise: China is showing signs of rapid growth
Managing risk
In the meantime, companies are doing their best to manage an increasingly tangled web of financial, political and geological risk. If they decide to explore in a traditionally safe and established jurisdiction, they reduce political risk and have a better shot at getting funding - but then the most prospective acreage is usually already tied up and it can be tough to generate speculative interest in a mature area.
Accordingly, companies have had to greatly expand their risk profiles over the past decade by moving into more prospective but unstable jurisdictions. But having a well-connected local partner can be very effective in managing political risk, says Mr Humphries of Patagonia Gold. "You have to have strong local partnerships. And you have to have a good relationship with the people that have ties to the land. Above all, you must be prepared to share. If you try to go in and say I want 100 per cent, you'll end up with 100 per cent of nothing."
It doesn't always have to be a local partnership, though. Teck Soon Kong, non-executive chairman of Kazakhstan-focused Sunkar Resources, says: "If you have a significant local shareholder, it can serve the same purpose."
Nearly every executive the Investors Chronicle spoke to said Aim and the London market provide a good home for their business – and one that is prepared to accept risk in return for big rewards.
"Retail shareholders here are remarkably well informed and broadminded about political risk," says North River Resources' Mr French. Richard Prickett, chief executive of Landore Resources, concurs, scoring points with IC readers in the process. "If you're quoted, you have to have a good band of retail shareholders. They're very helpful the whole way along, and they're incredibly loyal. I actually think they're more loyal than institutional investors."
Admittedly, those loyalties may be tested over the next few years if the downward trend in junior resource stocks since early 2011 doesn't reverse soon. But one thing is certain. Most of the executives will still be running speculative resource ventures. As one put it: "Even the companies that don't make it this time around will come back in 10 years. They'll have different names, of course, but the same projects."
