Aim explorers gasping in financial quicksand

Matthew Allan

Aim explorers gasping in financial quicksand

Times are tough for miners - but they're about to get a lot tougher. The head of a UK brokerage firm thinks as many as 50 per cent of Alternative Investment Market (Aim)-listed junior exploration companies could be forced to de-list in 2013 because they won’t be able to raise enough money to continue operating.

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.


Explorers flush with capital
Company nameTickerCash and equivalents as of latest quarter (£m)Recent financial activity
Base ResourcesBSE69.0
Nautilus MineralsNUS56.4
Sirius MineralsSXX36.8
Chaarat Gold HoldingsCGH33.5
Metals ExplorationMTL28.8
Afferro MiningAFF27.4 Received $50m post reporting period
Zanaga Iron OreZIOC27.1
Ovoca GoldOVG16.5 Cash and investments total $48m after an asset sale
West African MineralsWAFM12.9
Copper Development CorpCDC10.8
African Eagle ResourcesAFE10.6
Nyota MineralsNYO9.5
Orsu MetalsOSU8.5Recently arranged $25m debt financing 
Aureus MiningAUE7.9 Raised £50m post reporting period
Horizonte MineralsHZM7.6
Churchill MiningCHL7.5
Stratex InternationalSTI7.1Recent asset sales which yielded $21.7m cash
Ortac ResourcesOTC6.7
Kolar GoldKGLD6.5
Papua MiningPML5.7
HummingbirdHUM4.5 Raised £12.4m post reporting period
EMEDEMED3.2 Arranged $50m funding package post reporting period
Serabi GoldSRB0.3Raised £16.2m post period-end
Source: Investors Chronicle and S&P Capital IQ

Explorers short on capital
Company nameTickerWorking capital as of latest quarter (£m)Recent financial activity
Kalimantan GoldKLG0.344 Carried on some exploration in Indonesia with Freeport-McMoRan
Ariana ResourcesAAU0.315 Raised £580,000 post period-end
Thor Mining PLCTHR0.299
Botswana DiamondsBOD0.297
Rare Earth MineralsREM0.147 Raised £402,000 post period-end
Great Western MiningGWMO0.064
Connemara MiningCON(0.065) 
Wishbone GoldWSBN(0.116) 
Scotgold ResourcesSGZ(0.14)  Raised £475,000 post period-end
Conroy Gold and Natural ResourcesCGNR(0.217) 
Namibian ResourcesNBR(0.347) 
Paragon DiamondsPRG(0.451) 
Karelian Diamond ResourcesKDR(0.688) 
Regency MinesRGM(0.833)  Raised at least £619,172 post period-end
Alba Mineral ResourcesALBA(0.932) 
Astar MineralsASTA(0.987)  In talks with creditors over entering administration
Galantas GoldGAL(1.05) 
Oxus GoldOXS(11.1)  Raised £406,917 post period-end
Peninsular GoldPGL(19.4) 
Norseman GoldNGL(22.4)  Recently entered administration
Angel MiningANGM(24.9)  Recently entered administration
Creat Resources HoldingsCRHL(29.4) 
Source: Investors Chronicle and S&P Capital IQ

IC View

We don’t recommend investing in any of the cash-strapped explorers listed above. Granted, a few of them will manage to find enough capital to live and fight another day. But if you’re simply praying for your dying horse to be resurrected in time for the races, you should consider this a prudent opportunity to cut and run before things get worse. Even the cash-flush explorers have problems as it is.

Take Nautilus Minerals, the deep-sea miner whose share price quite literally fell off the deep end last year – from 150p to 25p in just six months. It may have cash aplenty but the company doesn’t have a rope or a hope of being dragged back into favour with investors. After entering arbitration with the government of Papua New Guinea and terminating its equipment build, this one’s best left drifting out to sea.

Yet there remain a handful of companies out there with promising projects and capable management teams. We can separate them into two groups: developers and explorers. In terms of developers – those companies actively trying to take their advanced project into production over the next year or two – Afferro Mining, Aureus Mining , Base Resources, Serabi and EMED Mininglook attractive enough bets. The problem is that shares of project developers rarely appreciate until production is about to commence, so investors may have to be patient during the construction process to see substantial rewards. As for the explorers, we favour Hummingbird Resources, Stratex International, Ovoca Goldand Horizonte Minerals.

And even though it goes against our previous advice of not recommending cash-strapped explorers – rules are made to be broken, after all – Botswana Diamondshas some very interesting early stage diamond prospects that could turn out to be hidden gems, as well as an intriguing partnership with a diamond major it refuses to name. It’s also backed by a well-heeled Irishman with access to capital, John Teeling – although it has to be said his exploration ventures are yet to prove as resoundingly successful as his Irish whiskey distillery business.


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