Junior mining - Sahara desert or last of the bad years?

By Siobhan Lismore-Scott
Published: Monday, 28 January 2013

A recession, a slowdown in demand, a crashing Eurozone and a shaking of confidence - we have all lived through the past three years and seen the effects on the industrial minerals sector. But what does the space look like now for junior miners? Siobhan Lismore, editor, finds out.


“It ain’t no trick / to get rich quick / if ya dig dig dig” Heigh Ho, written by Frank Churchill (music) and Larry More for Snow White
Image: Canada Lithium
2012 saw a crash in the Eurozone, a tickdown in the Chinese economy and insecurity growing around the US economy, leaving most indications at bearish for the year ahead.

However, a panel made up of the broader finance community at December’s Mines & Money conference in London argued that 2012 “was the last of the bad years”.

“We have been through the last of the bad years. There is clearly money around for good stories and good management,” John Harrison, executive chairman, London, RFC Ambrian, a specialist resource and energy sector corporate finance and stockbroking group, said.

But if that is the case, what should junior miners be doing in the coming months and years?

‘Be creative’

Junior mining companies have to now be more creative when looking for funding, the panel agreed.

“For many of the smaller companies in the field, we are talking about the fact that the money is there, but you need to look in different locations. Your traditional or private broker is not there,” John Carlesso, president of Cervello Capital, a Toronto-based private merchant bank, told conference delegates.

“There are other opportunities out there; it is a question of being creative and it’s a question ofÊfinding the right kind of assets,” he added.

Chris Berry, founder of market research firm House Mountain Partners, who was speaking during December at IM’s graphite conference in London, agreed that junior miners have to be creative when looking for funding, but they must also be prepared to fail, adding that the present drought in the funding community is akin to the “Sahara desert”.

“Things look bleak in this sphere,” he said.

“Equity finance is not in a drought, it’s a Sahara desert [É] But the good projects will get built,” he added.

“In today’s situation, the biggest challenge that juniors face is the raising of the capital required to develop their projects,” Brent Thompson, senior vice-president of mining and minerals at global consultancy Tetra Tech, told IM.

“The traditional equity sources are not there right now,” he added. “There is a lot of money sitting outside the market waiting for a bit of market stability before they come back in - and so the junior mining companies are having to access capital from what they call ‘non-traditional sources’.”

“That could mean direct investment from Asia - it could be from innovative funds being established to provide access to capital they could be raising in areas they haven’t raised before. But certainly we are seeing a big trend in the financing of these projects from non- traditional sources,” he said.

New forms of financing

New ways of finding financing were discussed at the Mines & Money event, with different solutions suggested. Most agreed that the days of “rocking up to the conventional fund market” were over.

“There will be periods of volatility and, in that time people, will be able to raise capital for their projects and stay alive, and some of them will sustain themselves that way. In terms of sourcing for funding and in terms of the alternative sources of funding that we’ve seen, is the stream-financing models,” Mark Reineking, founder and MD, Tempest Funds, a Vancouver-based investment fund and portfolio manager, said.

Stream-financing companies, such as Canada-based Sandstorm Gold and Sandstorm Metals & Energy, have gained popularity because of the alternative way they offer juniors financing.

“Sandstorm [...] provides mining companies with a form of financing whereby an upfront cash payment is exchanged for a commodity stream,” the company said.

The commodity stream allows Sandstorm to purchase a specified percentage of a mine’s production, at a fixed cash cost, for life of the mine. Sandstorm then resells this on the spot market.

“A lot of these companies have really good assets that are trading at a fraction of their net asset value, so if you’re trading at .4 of your value, a stream company, such as Sandstorm can come in and pay you .8 or .9 of your asset value, which is created to shareholders. This is one form of financing I have seen and what that does, typically, is increase the equity,” Reineking said at Mines & Money.

“This is a trend we are starting to notice,” Thompson told IM.

“I’m pretty positive about it in the short term, and certainly if it’s a way for junior miners to gain capital in order to bring a project online,” he added.

“There are mining companies that are accessing capital through streaming. We are seeing that both in Canada and the US, which is interesting. I guess the question is that, going forward in the market place, can the market be used to change in its dynamic, will a model like that still work?” he asked.

Another factor discussed at Mines & Money was the prospect of diluting ownership by issuing additional common shares on the market. This reduces the company’s debt, but means they have less control.

“The big issue for a lot of companies is dilution, and I think dilution is in the eye of the beholder,” Jamie Strauss, partner at EU consultancy Strauss Partners, said.

“Do you want to have a mining operation in two or three years’ time with a cash flow, or do you still want to be scrabbling around for money, hoping your stock will go up?” he asked.

Acquisitions and off-take agreements - seen increasingly in recent times - were also discussed at Mines & Money, with Carlesso saying that he believed this would be “source of capital for the short term, through 2013”.

Anthony Desir, principal, Selective Asset Management Inc (SAMI), agreed, saying he believed that “off-take strategies are key”.

“Spin-off the assets, put them in a separate company and, at some point, you can realise a greater value by creating an off-take structure and selling that off to another party. That actually creates more value for your shareholders,” he said.

“One thing we have observed with the China model is that, although China says they are doing a lot of investment in the African market, in fact it is just an off-take strategy,” he added.

Good management is key

That good management was absolutely key for investing in a project was an overriding sentiment at Mines & Money.

“Institutional and hedge-fund markets are closed, but mining companies with a track record and an excellent management team - both at the top and throughout the geological mine building side - have an open opportunity to go to a wide area of non-traditional funding,” Strauss said.

“I agree there’s funding available for really good assets and management teams,” Reineking said.

While a good management team was key, thorough preparation in approaching the financing community was also crucial, said Harrison.

“Junior companies have to realise that the conventional fund-management community doesn’t need to own their shares,” he said.

“You don’t just rock up to the conventional fund market and say ‘here’s your lucky chance’. You need to come in off a long run. You need to prepare, know the investment community and present your story at a time when you don’t need money to get ready for the time that you do. And, over and over again, people don’t seem to want to do that,” he added.

“Raising money is challenging in today’s market, especially for junior exploration-stage companies,” Jay Roberge, associate partner at Zimtu Capital Group, told IM.

“However, cycles happen for a reason. It takes the market through a consolidation and cleansing that results in a strong market. In the end, strong management teams with strong assets will emerge, the weak will stumble, and there will be less competition for capital. It fundamentally provides clarity and improves confidence,” he added.

Bert Doth, director of Denham Capital, a private equity firm focused on energy and commodities, stressed that management teams are key when it looks to invest in a company.

“It’s about people for us; assets do not make money on their own,” he said at Mines & Money.

“It really depends on the quality of the people behind the venture, and whether they have made it successfully before,” he added.

Australia and Canada eye investments

Recent headlines would suggest that the mining community might not be in as much trouble as it may have thought.

Jeffrey Wilson, a fellow of the Asia Research Centre at Murdoch University, Australia, said in a recent report that “much of the rhetoric around the supposed mining bust rests on dubious analysis”.

“By looking at the mining sector as a whole - and considering the three distinct stages which mining projects pass through - we can see that the reality of the sector today is more nuanced than simply being a boom or a bust,” Wilson argued in an article for Australian academic journal The Conversation.

The three stages are identified as being the design stage, the development stage and the operational stage.

As more junior miners turn to the bond market for financing - employing the ‘more creative’ ways to secure funding discussed above - the debt market has responded by offering more attractive deals for development-stage projects.

“There’s never a more attractive time to access the bond market for a mining company,” Randall Oliphant, executive chairman of New Gold Inc., told the newspaper.

From a junior’s perspective: Energizer Resources

As a junior miner Energizer Resources is all too aware that it needs to present its graphite project in Madagascar, Molo, to the market in a way which will emphasise the potential for return.

“Have a good project”

In 2012 the company delivered its NI 43-101 (see pp56-57) complaint mineral resource estimate, which it said exceeded expectations.

- Indicated resource 84m tonnes grading 6.36%C (2% C cut-off)

- Inferred resources 40.34m tonnes grading 6.29% (2% C cut-off)

- Two high grade zones with combined indicated resource of 60.17m tonnes grading 8.1% C (4% C cut off)

The company has targeted the lithium and the lithium-ion battery market. Li-ion batteries use at least 11 times more graphite than lithium. The PEA study is due in February and the BFS is to be completed Q4 2013.

“Have a good management team”

Kirk McKinnon CEO
brings over 25 years of senior management experience to the Company.

Craig Scherba president/COO
has been a professional geologist (P. Geol.) since 2000, and his expertise includes supervising large Canadian and international exploration.

Peter Liabotis senior vice president/CFO
has been with the company since 2009. Prior to this he worked at a high level, for EFG Wealth Management (Canada), Ltd, Olympia Capital (Bermuda) Ltd,Ê PriceWaterhouseCoopers and KPMG.

“Be listed on an exchange”

Energizer is listed on the Toronto Stock Exchange (TSX) (see pp 42-45), the OTC Bulletin Board (OTCBB) and the Frankfurt Stock Exchange (FWB).