Birth to Death: The Lifecycle of Junior Miners

With markets turning of late, there’s been talk of a “die off” for junior mining companies.

Analyst John Kaiser, for example, noted at a January investment conference that “the departure of 500 resource juniors would be a healthy development for the sector.”

Eric Coffin of Hard Rock Analyst agrees; he stated at the same conference that investors “need to see 500 [juniors] or so go away.”

But do juniors ever really die? What does it mean for investors if they do?

Below, Resource Investing News looks at what might trigger a die off of juniors, examining how these companies begin, what causes them to fail and what effects a widespread die off would have on investors.

The lifecycle of a mining company

Listed mining companies in Canada generally begin in a few ways.

Usually, mineral projects begin as private firms. A geologist will incorporate a company to apply for exploration licenses in Chile or Madagascar, or a group of enterprising businesspeople will sign an earn-in agreement on a property owned by a third party, assigning this agreement to their own private company created for the venture.

Some of these companies then remain private. BlackRock Metals, for instance, is a privately held mineral development company that is advancing iron-vanadium projects in Quebec. The company has raised over $40 million, so management has felt no need to access the public markets.

But many companies need to go public. When looking for financing, a lot of investors simply won’t pony up their money if they don’t have an exchange where they can easily sell the company’s shares.

For entrepreneurs looking to make the jump from private to public, there are a few options.

Owners of the private firm can do a straight-up initial public offering (IPO). The private company simply applies to have its shares traded on a stock exchange, often with an associated financing.

Private companies can achieve the same effect by merging with a “cash box” listed company — either a capital pool company (CPC) or a shell.

CPCs are listed companies that are created with a few hundred thousand to a few million dollars in the treasury. They have no business of their own — the owners and management create the CPC in hopes of finding a private company that needs an easy option for going public. They then offer the CPC to the private group in exchange for a small percentage of ownership in the final, combined public firm.

Sometimes multiple CPCs merge together to join funds. Terrace Energy (TSXV:TZR) was created this way, giving the company more cash to advance its oil and gas projects.

Taking a swing

Once public, these companies get to work advancing their projects. They drill. Sample. Spend the money they’ve raised.

The hope of such companies is that this work will create a higher value for their projects, allowing them to raise additional funds at higher share prices and reducing dilution to early-on shareholders.

Ultimately, a successful junior aims to undergo the sublime transformation of being acquired by a larger company, with the incoming owner paying a much higher share price for the buyout than the existing shareholders paid for their stock — creating a capital gain for all.

Such a golden end came to Colombian gold developer Ventana Gold in 2011, when the company was bought by Brazilian billionaire Eike Batista for $13.06 per share.

The shares had enjoyed a spectacular run, rewarding investors with a 37-fold increase in the two years leading up to the buyout.

But few juniors enjoy this sort of success. For many, cash goes into the ground with ho-hum results. The company’s share price languishes and raising more money becomes difficult.

It is at this at this stage that death can come knocking.

The delisting stick

The technical term for death in this case is “delisting,” a situation where a stock exchange kicks a company off its roll for noncompliance with listing requirements.

There are a few things that can trigger such a dumping.

Often they are driven by cash. The TSX for instance, requires its listees to hold at least $50,000 in working capital. Firms also need to have enough funds on hand to cover operational and general and administrative expenses for six months.

TSX-listed companies must also continue some level of project activity. The exchange mandates that at least $100,000 must have been spent on exploration or development activities during the two most recent financial years.

If a company fails on any of these counts, the exchange has a few options.

It can delist a company completely, making the firm once again a private entity, without any trading home for its shares. Or the exchange can suspend the company’s shares, freezing trading until the condition of the company improves.

In such cases, investors generally lose out completely. Shareholders might still be allowed to sell their stock in a private sale, if they can locate a buyer. But the state of the company usually makes such purchasers few and far between.

In some cases, specialist restructuring firms will purchase shares in suspended or delisted companies to take control of the outfit and revamp it for a new launch. But these buyers don’t pay a lot — investors generally end up with pennies on the dollar.

Delisting and suspension, however, are drastic steps that are usually only taken when companies have dire problems like pending bankruptcy.

The alternative is the TSX graveyard: the NEX.

The dead zone

The NEX is a forum where failed companies can go on breathing. After a company runs low on cash and ceases its operations, it can transfer to the NEX and have its shares continue to trade while it looks for new options.

Investors in NEX-listed companies can still trade the shares (which carry the brand “.H” after their stock symbol). However, trading volumes and share prices on NEX-listed companies tend to minimal.

But from this death can come new life. Sometimes NEX-listed companies become desired, even sought-after commodities and are used to take new private companies public.

That’s because many entrepreneurs believe it is easier to go public by amalgamating their private company with a NEX shell rather than through a CPC or an IPO. Rules around NEX companies are less prescriptive, and it helps that these firms have an operating history — sometimes a lengthy one.

Such buyers will “groom” NEX shells, buying up available stock to increase their control and working behind the scenes to fix reporting or structural issues with the corporation.

That can provide an out for shareholders, who are then able to sell their stock to a would-be new owner.

But for shareholders in NEX companies, sometimes the best bet is to hold on for the ride during a restructuring. If a NEX shell is properly groomed and a new, quality project is vended in, the company’s shares can soar from pennies to dollars overnight.

Such was the case with Newstrike Capital (TSXV:NES), which bumped around the NEX before getting an injection of capital from billionaire financier Lukas Lundin. The firm then picked up a new Mexican gold project and shares subsequently went from pennies to as high as $3.

It’s for this reason that many seasoned junior mining pros believe most resource companies never die. They simply go on life support periodically, waiting for the next bull market to rise again.

 

Securities Disclosure: I, Dave Forest, hold no investment interest in any company mentioned in this article.

Related reading: 

The TSX Venture is Broken. Here’s How to Fix It

TSX Venture Boss Downplays Junior Mining Woes

Rick Rule, Mickey Fulp, Lawrence Roulston: What to Do With Your Depressed Junior Mining Stocks