Aim explorers gasping in financial quicksand

Now, we always take whatever brokers say with a generous pinch of salt. But long gone are the days of easy money given to hapless management with low-quality exploration plays, simply because the rising tide of commodity prices lifted all boats. Institutions and private investors have been burnt too many times these past few years even as commodity prices soared to all-time highs. Today, risk capital for mining ventures has all but dried up.

"It's sad but most of the junior explorers are in dire straits", says John Wong, a senior fund manager at New City Investment Managers. "Most are not finding decent enough grades or sizes, and barely anyone will give juniors money to build their own mines any more. And if the majors don't buy them, their projects will eventually have to be shelved."

Depressed yet?

Research by the Investors Chronicle reveals 45 of 146 mining companies on Aim had less than £500,000 in working capital at the time of their last reported financial statements - barely enough to cover listing fees, management fees and office space for a year, let alone the odd site visit and light field work. That's a remarkable one-third of junior mining companies up to their necks in financial quicksand. And if you strip out companies that already generate cash flow from mining operations, that number rises to nearly one-half.

As geologist and newsletter writer Brent Cook puts it: "We tend to forget that a junior mining company is a perpetual share issuance machine, usually with no visible means of support, which sells dreams to the dreamers in the good times and slowly dilutes the dreamers out of existence during the bad."

But with the usual sources of capital tapped out, this cycle has turned even more vicious. Many explorers can no longer afford to explore and can't raise additional funds even at low and extremely dilutive prices. And if they can't explore, they can’t drill their projects or generate new prospects to keep current investors interested in their story, let alone bring in new ones. So share prices keep ticking down on lower and lower volume, further scaring off potential new capital.

The price is right

Nevertheless, some creative minds have had success finding capital through alternative forms of financing - often without immediately diluting minority shareholders. Africa-focused gold explorer Hummingbird Resources (HUM), for example, managed to raise $15m (£9.4m) for exploration by selling a 2 per cent royalty on any future production to mining investment group Anglo Pacific (APF). In addition, Hummingbird tapped the International Finance Corporation, a World Bank subsidiary, for a £3m equity investment on account of how it is trying to advance Liberia's nascent mining industry.

EMED Mining (EMED), meanwhile, recently raised $50m by selling limited offtake rights; in other words, a third party provided mine financing upfront in return for the exclusive right to buy a portion of future production at market prices. Other, more desperate miners such as Shanta Gold (SHG) have had to settle for high interest-bearing loans secured against the company's producing assets, or in the case of Scotgold (SGZ), loans that are convertible into shares.

Even a few tiddlers have stumbled across substantial sums of capital, whether by good fortune or good connections - or both. Sunrise Resources (SRES), a down-on-its-luck diamond explorer, recently entered into a £3m equity financing facility with a resource fund managed by Henderson Global Investors that allows it to draw down capital in dribs and drabs when needed. Likewise, ECR Minerals (ECR), Red Rock Resources (RRR) and Arian Silver (AGQ) have made similar arrangements with resource funds controlled by United States-based Yorkville Advisors.