In the 2014 version of its annual Tracking the Trends report, consulting firm Deloitte outlines the top 10 issues mining coming will face in 2014, among them, unsurprisingly, the obstacles that junior companies are facing in attracting funding needed to fuel exploration expenditures, not to mention annual costs such as office overhead, salaries and listings fees.
Deloitte makes the point that should a widespread failure of junior mining companies in certain commodity markets occur, the consequence could be shortfalls in the commodities that the majors no longer produce — using molybdenum and ferrochrome as examples.
Ever-resilient juniors, however, are finding ways to get their needed capital injections. Deloitte identifies six strategies that they are pursuing:
Sovereign wealth funds: While the dominant sovereign wealth player is China, the report states that Indian, Japanese and Korean investment houses are also getting into the mining game. An example was the 2012 announcement by India that it wants to create a fund to acquire coal blocks in other countries — following the model of Chinese state-owned enterprises, which have invested heavily in Africa. Zimbabwe said in October that it plans to set up a sovereign wealth fund by next February in order to buy shares in foreign-owned companies, including mines.
Private equity: In 2012, eight mining funds raised US$8.5 billion, according to research firm Preqin, quoted by Deloitte. That is about four times greater than the roughly $2 billion Canadian miners are expected to raise in 2013 on equity markets, states a Financial Post article. Large private financings this year include Brookfield’s $130-million investment in North American Palladium (TSX:PDL,NYSE:PAL). But according to Deloitte, “many analysts still believe the sector is too big – and timelines too long – to sustain private equity interest.”
Non-traditional stock markets: Some juniors, fed up with high listing fees and burdensome regulations, are going outside the usual TSX or TSX Venture exchanges and are setting up listings in Singapore, the United States, Europe and even Hong Kong, notes the report.
Alternative financing: Some explorers are tapping the bond markets for higher-yield investments, while others are seeking different sources of funding through royalty and streaming arrangements, offtake deals, joint ventures and equipment ﬁnancing, the report states. An example is Terraco Gold (TSXV:TEN) in Nevada, which has a net smelter returns royalty at Midway Gold’s (TSXV:MDW) Spring Valley project — which is in turn 60-percent owned by the world’s largest gold company, Barrick Gold (NYSE:ABX,TSX:ABX).
Pension funds: Pension funds are looking to mining assets as a hedge against inflation, and mining’s long-term assets and returns dovetail with pension funds’ long-term liability profile, according to Deloitte. Earlier this year, a state-supported pension fund effectively became Britain’s largest coal company after it took over the pension fund operated by UK Coal in a bid to safeguard the jobs of 2,000 miners and the pensions of nearly 7,000 retired workers, The Telegraph reported.
Consolidation: In an effort to lower labor and equipment costs, some juniors are pooling their capital and resources. “Although transactions are down, companies that can present buyers with a strong rationale for their asset pricing are more likely to attract investor interest,” the report says. One example is the Western Athabasca Syndicate, an alliance of four uranium exploration companies that came together earlier this year to save costs and explore for the nuclear fuel in what is arguably the highest-grade uranium district in the world — Saskatchewan’s Athabasca Basin.
Securities Disclosure: I, Andrew Topf, hold no investment interest in any of the companies mentioned.