It is not all bad, and other lessons for the junior sector

While junior mining experts and survivors of previous downturns don’t agree on everything, there are still a few reasons to be positive.

Author: Kip Keen
Posted: Friday , 12 Jul 2013

HALIFAX, NS (MINEWEB) -

So we conclude our junior survival series. It was a chance to take the temperature of the junior market and illustrate the challenging - hypothermic - environment it is now facing. It was also a chance to explore how the market got here and where it may be going.

Juniors - and majors for that matter - face the wrath of shareholders for two reasons in particular: the movement of capital into broader markets and new investment vehicles, such as precious and base metal ETFs, and the unrealized expectations of investors who were looking to profit from what they had hoped would be new discoveries and growing margins on higher metal prices. Neither of these two latter expectations happened enough, to be sure.

The result has been tough for juniors, driving them into a downturn that, at least in terms of the recent lack of financing, is beginning to rival the early 2000s - not a good time. According to Archer, Cathro and Associates’ Doug Eaton captured the state of things for juniors, explorers especially, putting it this way: “It's dreadful. It's maybe not quite - not quite - down to the level of the early 2000s,” he said, adding: “And the only reason I would say it's not quite there yet is because there's enough fat in the system.”

Fat in the system. There is still some there, but it is dwindling. John Kaiser, of Kaiser Research, has noted as much in previous articles on the subject in these pages.

See also: Cashless juniors! Off with their heads!

The cash balances of a vast number of companies on the TSX-V has dipped under C$200,000. It's close to half the 1,800 or so listed juniors on the Venture and, as such, means there's little fat there for exploration.

This brings up the question of how long this cold front facing juniors may last: will it be a long one, like the late '90s to 2000s? Or, perhaps, given higher metal prices, for example, shorter, with a quicker turnaround on the horizon? Opinions varied, though for explorers the answers were slanted towards a downturn continuing for a while.

Exploration Insights’ Brent Cook is, however, prepared for something more epic and sector wide. “I think we're in for a long, slow, stretch where mines go bust, companies go bust and the sector consolidates,” he said.

But Lukas Lundin, Chairman of the Lundin Group and Stan Bharti, head of Forbes & Manhattan were somewhat optimistic in terms of the overall metal market. Bharti called recent metal prices declines a severe correction, but put them in context of the great run we've had over the past decade. Likewise Lundin expressed that in historical context metal prices were not bad.

Neither Bharti nor Lundin suggested, however, that it would be easy for early-stage explorers or that a quick turnaround was likely to come for them. Money, in their view, would go to the larger producers first and the rest thereafter. Explorers last.

Bharti, as others, still saw appetite for higher risk speculation returning. The game is not up, not forever.

“I think the speculative money will come back. But it's gonna take another six months to a year,” he said. “I think there's a cleansing that's going on. After it the money will come back. Because listen, in a bull market in commodities such as we're seeing now, the opportunity to invest at very low level and see a 5x, 10x return - there's no other place where you can do that.”

Consolidation. It was an oft repeated point. Robert Quartermain, Pretium’s President and CEO, looked to the past in which consolidation between juniors was typical of downturns in the '80s and late '90s. He, as others, suggested it would be the case again.

“I'm sure we'll see consolidation on the TSX-V and possibly on the senior board, to a certain extent, and among other mid-tier companies,” Quartermain said.

And opportunity. It was another term that often came up. There were undervalued stock. Cook noted he was buying and holding deposits he saw as poorly valued in junior shareprices. Likewise, for teams with cash, it was a good time to pick up assets. And if not buying new assets, it was a time for sharpening pencils to better appreciate existing ones. Perhaps some surprises will come of this latter exercise.

A Darwinian, survival of the fittest, mentality was also present. Lundin speculated the downturn could be a good thing, removing some of the lesser quality teams and assets from the playing field. Likewise, Cook pointed out that while majors and mid-tiers may for now have turned their gaze away from acquisitions and building up reserves, at some point they would have to face the reality of declining production stock and grades.

“That's the positive news to all this. After the dust settles, there's going to be a few companies out there that are going to be extremely valuable,” he said.

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