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Analysis: As Canada's junior miners flounder, long-term damage looms

Buildings are seen in the financial district in Toronto, January 28, 2013. REUTERS/Mark Blinch
Buildings are seen in the financial district in Toronto, January 28, 2013. REUTERS/Mark Blinch

By Allison Martell and Euan Rocha

TORONTO (Reuters) - Hundreds of small mineral exploration companies may have their stock delisted by Canada's TSX Venture Exchange in the coming months, choking off a development pipeline that has long supplied major miners with new projects.

As commodity prices boomed in the last decade, a flood of new issuers swelled the ranks of the Venture, TMX Group Inc's exchange for small-capitalization companies, burnishing Canada's reputation as the center of global mining finance.

But the money has dried up over the past two years, thanks to a slump in metal prices and a spike in costs. Hardest hit are the Venture-listed, exploration-stage companies that depend on equity financing to develop their properties to the point where they can build a mine or sell the asset to a major.

"There's a crisis that's looming," said Joe Groia, a securities lawyer and former head of enforcement at Canada's top securities regulator, the Ontario Securities Commission.

"If we continue to not address it, what we're going to end up with is literally hundreds of companies where boards are either going to walk away or hundreds of companies that are going to run out of money."

The disappearance of a large number of small companies would affect the global mining sector for years, given that it is juniors that typically find world-class assets that big players later build into producing mines.

It can take years to estimate the value of a mineral asset, plan a mine and start the permitting process, and it is neither quick nor simple to resume work on a mothballed early-stage project.

And while the mining sector has always been subject to boom and bust, the potential shake-out could be especially damaging this time. A dearth of companies with proven assets could hit future supply of many different resources and drive up prices.

MOST OF WORLD'S PUBLIC MINERS

Canada's financial market affects the mining sector around the world, because the Venture and the main Toronto Stock Exchange are home to nearly 60 percent of all public mining companies. The two exchanges accounted for 40 percent of all equity financings in the industry between 2008 and 2012, and 70 percent of the equity capital raised in the sector in 2012.

Nearly half the projects owned by the roughly 1,700 miners listed in Canada are located overseas, so the funding crunch is already curbing investment around the world.

SNL Metals Economics Group, which tracks exploration in the mining sector, said its May-June index of planned mining activity fell to the lowest since it began compiling data in 2008, as lower spending and weak metals prices halt development projects and delay capital investment.

The Venture brought in temporary relief measures last August that allowed some of its weakest companies to raise small amounts of money. But these are due to expire, exacerbating the funding crunch. With cash running out, there is no consensus on how to get the market moving again, and a lot of talk about large-scale delistings.

More than half the 839 mining-focused Venture companies for which Thomson Reuters data is available had less than C$500,000 in cash and short-term investments at the end of the first quarter. Most are micro-cap companies exploring for minerals or aiming to develop early-stage projects around the world.

Brendan Cahill, chief executive of Excellon Resources Inc, a silver miner and precious metal explorer, expects the number of Venture companies to fall, and not just temporarily.

"A good comparison is the Nasdaq," he said. "Although it has recovered, it has never got back to the number of listings it had during the tech bubble."

DODGING BULLETS

In online newsletters, at town hall meetings and over pints, mining insiders have traded grave statistics about cash and working capital for nearly a year. But there have so far been relatively few delistings, in part because of the temporary relief measures.

The Venture relaxed some financing rules, allowing some offerings below 5 Canadian cents a share. Issuers have raised as little as C$50,000 ($48,000) in a private placement, barely enough to keep the lights on, let alone boost the value of their assets by drilling for minerals.

John McCoach, president of the TSX Venture Exchange, told Reuters those measures will likely be allowed to lapse at the end of August. Without them, companies whose stock is below that level will need to consolidate shares before further offerings, something many simply cannot afford.

According to data from Oreninc, which tracks the financing market for miners in Canada, about 50 Venture-listed resource companies have closed offerings below 5 Canadian cents since last fall, mostly raising well below C$500,000. One company raised just C$42,500.

The cost of maintaining a public listing, even on a low-cost exchange like the Venture, means these small offerings in most cases simply buy cash-strapped companies time to sell assets, pay expenses or hope for markets to turn.

Most industry experts say exploration companies need at least $500,000 annually to pay auditors, hold annual meetings, and pay things like listing fees, lawyers and bankers. So there's nothing from a small offering left for a drill program.

"It's survival, and we're into an environment now where you're living on hope that the commodity market is going to change," said Kirk McKinnon, the chief executive of MacDonald Mines Exploration Ltd, which is exploring in northern Ontario. "A rising tide raises all boats."

(Editing by Janet Guttsman, Frank McGurty and Leslie Gevirtz)

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