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Junior Miners: From Near-Bankruptcy To Discovery

Summary

Junior miners have been battered due to lack of discovery, but could breathe new life to their operations with mergers and alternative financing.

Grant Thornton Canada and UK reports that a third of executives believe they are going to either take over a smaller unit or be the subject of a takeover.

Some junior miners believe they can hold their own without seeking backing from major miners.

Everyone from the metals and mining sector knows how tough it is to be a junior miner in the industry. This has become even more apparent during a recent trade show geared toward junior miners in Canada. According to a report on The Financial Post in late September, junior miners are so strapped for cash that most of them declined to occupy a slot at this year's annual Cambridge House International conference in Toronto.

Peter Koven, the writer of the piece, lamented this fact, considering that the conference was intended for junior miners and is one of the year's biggest events in the sector. "The junior mining sector is in such brutal shape right now that most companies are unwilling to even pay for booths at conferences that are geared to them," Koven said of the dismal trend.

Unlike their producing counterparts, money is hard to come by for most junior miners-startups and small companies engaged in exploration or mining pre-production-as capital inflow is only certain unless they have transitioned into production. But it takes ages for these junior miners to switch to production as converting their licenses is an arduous, multi-step process.

Complicating their predicament further are difficulties in securing funds to move their project forward, and investors' shaken confidence in small mining stocks. "Investor appetite for small mining stocks has simply evaporated over the last several years after they lost billions of dollars on these companies. Other sectors of the market have performed much better and drawn their attention elsewhere," Koven noted in his article.

Citing Bloomberg, Money Morning reported that many junior miners quickly use up their limited funds and that Bloomberg News estimates showed these miners only possess 5.7 months worth of cash on their balance sheets that translated to a 25 percent decline from last year. If they don't find a way to plug the gaping hole in their budget, they could lose their ability to further their endeavors and eventually, close shop.

The short-term solution, of course, is to cut down on costs. David Poynton, president of Daycon Minerals, believes that junior miners should re-plan their budget and seek other financing services such as royalties or stream financing. He also advised miners to ask around for their options. "If financings are dead, what other alternatives are there? Seek royalties or streams. Speak to your neighbours. If you have done this once, ask again," he was quoted as saying in The Northern Miner.

Exploring M&A Options

What are their other options then? For one, they can become the subject of a takeover bid from larger mines. Poynton also recommends going this route. "Many companies at this stage are surviving by merging with cashed-up companies. Such deals can be expensive, but do achieve the goal of survival. Time to look around - time to find that big company corporate saviour with an investment in juniors program," he said.

Grant Thornton Canada and United Kingdom reported that a third of executives who participated in their recent poll said they are looking at acquiring smaller firms or divisions before the year comes to a close. A third of executives from the other side of the fence also expects the same and is expecting a takeover, partial sale or recapitalization.

The sector is indeed ripe for consolidation for UK Grant Thornton's mining leader Chris Smith. "We've started to see elements of this emerge already, for example Glencore's approach for Rio Tinto and BHP Billiton's announcement that it will spin off assets," he said in an interview with Mining News.

"Executives at mining companies are telling us that they are in the market to make acquisitions and a near-equal proportion say they will sell their mining company, or parts of it, this year. So there is plenty of opportunity for doing deals, especially for those looking to seize opportunities with distressed sellers ahead of any improvement in the commodities market," he added.

According to Mining News, 32 percent of the 250 senior mining executives who participated in the Grant Thornton in the United Kingdom survey said their company is "likely to acquire a unit or firm." 27 percent, meanwhile, said they see a takeover bid coming soon or are likely "undergo a partial sale."

Junior miners were also surveyed by the accounting firm. The same Mining News report noted that 36 junior miners they plan to make an acquisition this year. 36 percent also said they "expected to be sold or partially sold."

Some players from the sector stand out: Amur Minerals Corporation (AIM: AMC), a LSE-listed exploration company with an ongoing exploration project in the Russian Far East, is a prime example of a junior miner that's ripe for a takeover bid. The company is currently focused on its Kun-Manie project in Russia which could begin production in the space of a year, granted that it receives final approval from Prime Minister Dmitry Medvedev for its application to convert its exploration license to a mining license for the project.

Another company that's worth major miners' attention is Guyana Goldfields Inc. (TSX: GUY), which has recently obtained financing for its Aurora Gold Project located in the Cuyuni-Mazaruni region of South American country Guyana. The gold project is slated to start commercial production in mid-2015 and has been reported to possess a total gold resource of 6.54 million ounces in the measured and indicated categories and an additional 1.82 million ounces in the inferred category.

Seeking Alternative Financing

Miners can also turn to some form of financing to traditionally fund their operations. The most commonly used financing schemes among junior miners are equity and debt financing. Equity financing involves selling equity at a "very low price-to-net asset value ratio, which decreases shareholder value, while debt financing involves bank loans.

Sandstorm Gold CEO Nolan Watson told Money Morning that debt financing is kind of problematic for miners as banks "typically" are not willing to lend money "against cash flows" for periods over five years. As most people would know, that's less than the time frame mines shift from exploration to production.

"The normal delays in getting a mine built and into production often bump up against the limits of a banker's patience with keeping such a risky loan on his books," Watson was quoted as saying by Money Morning.

Another financing scheme that's popular among mines is stream financing. Stream financing, according to a separate report from Reuters, is a financing scheme wherein miners get their loans upfront in exchange for selling a fixed portion of their production at a lower price. Soon the financing scheme evolved into a new way for companies to deliver their takeover proposition. Canadian miner Yamana Gold Inc. (YRI.TO) is one company that provided this type of financing to Osisko Mining Corp (OSK.TO). Eventually, white-knight investor Yamana offered Osisko a takeover bid for a 50 percent stake in the latter in April.

According to Reuters, the financing technique is increasingly growing in popularity in the mining sector as a means to pay for M&A deals. Experts see it as a way to boost the frequency of mergers and acquisitions in the metals and mining sector which declined across the globe by 30 percent from 2011 and 2013 to just 703 agreements.

"Inevitably, as streaming gains prominence across the sector, it is increasingly being considered as a form of acquisition finance, and will continue to do so," Lee Downham, lead partner for Global Mining & Metals Transaction Advisory Services, was quoted as saying in the Reuters report.

Working Independently

In Canada, a couple of "junior-backed" diamond mining companies have expanded operations thanks to explorations done by junior miners, according to a Yahoo! Finance report on Wednesday. These companies include AIM-quoted Firestone Diamonds PLC, which is planning to expand its Liqhobong mine in Lesotho, South Africa and Russian-based Alrosa also plans to open a couple of new mines.

A junior miner also got a boost at the same time. Stornoway Diamond Corp. (T.SWY), a small cap that's engaged in constructing Quebec's first diamond mine, raised C$950 million in financing in April.

Diamond mining is picking up steam recently after two decades that were devoid of discovery, industry analysts say; thus, the mining industry would need to keep up with renewed demand in the precious stone. A major player in this segment, Rio Tinto PLC (LSE: RIO), has just recently announced that it will spending $350 million to expand its Canadian, underscoring the opportunities lying dormant in the sector for smaller players with new mines.

Dundee Capital Markets analyst Matthew O'Keefe said the move could boost backing for junior miners and could help start M&As in the sector, especially among mid-caps. But Mountain Province Diamonds Inc and Kennady Diamonds Inc (CDNX: KDI.V) chief executive Patrick Evans would rather stay away from these consolidation activities.

"The juniors make the discoveries and the majors then try to swoop in. They caught us unawares last time round," he told Yahoo! Finance. "That won't happen again. We have the knowledge, we have the skills and importantly, we have the financial resources to be able to build Kennady Diamond as an independent diamond mine."

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.