TORONTO (Reuters) - A trickle of new investment into global miners has created a tidal wave of interest among hundreds of small mineral explorers desperate for cash, a Reuters survey shows, setting the stage for a competition to raise funds that some are sure to lose.
The mining sector has been in a prolonged downturn. Only months ago, it was nearly impossible for small explorers to find investors, reducing some companies to raising as little as C$50,000 ($45,100) at a time.
But recent fundraising success for established miners and a few exploration companies like North Arrow Minerals Inc NAR.V, Torex Gold Resources Inc (TXG.TO) and Lydian International Ltd LYD.TO has encouraged many tiny explorers, often called junior miners, that there is a window of opportunity to tap investors.
More than half of the Toronto Stock Exchange (TSX) and TSX Venture (TSX-V) miners and explorers that participated in the Reuters survey said they were “very likely” to seek financing in the coming 12 months, and roughly nine out of every 10 said they were at least “somewhat likely” to tap the market.
The issue is that there still isn’t a broad appetite in the investment community for miners, cautioned Jason Attew, managing director of global metals and mining at BMO Capital Markets.
“We are seeing some mojo back in the sector,” he said. “But, I do not want to characterize it as a market where every company can get financed. It is very selective with money going to high quality management teams and high quality assets.”
Others in the industry like Brendan Cahill, chief executive of silver miner Excellon Resources Inc (EXN.TO), agree that while money has begun to flow back into the sector, it has mainly gone to the big names and is beginning to filter down to the middle of the pack. But the juniors at the bottom of the field are yet to see much.
“For the exploration plays, other than the ones with the very highest quality projects, things are going to be tough for a while,” said Cahill.
Nearly half the 1,356 Canadian-listed mining companies for which Thomson Reuters data is available ended the third quarter with less than C$500,000 ($451,700) in cash and short-term investments. Half a million dollars is about what it takes just to keep such a company open for a year, without any exploration activity.
To shore up just those companies with just C$5 million each, about the cost of running a thorough exploratory drill program for a year, more than C$3 billion in investment would be needed.
Mining companies listed on the TSX Venture market raised C$5.9 billion in 2011, when metal prices were on a tear, but that fell to C$1.28 billion last year, underscoring the magnitude of the challenge these companies face.
Making it through the end of a down cycle, when an uptick starts, is often ‘the hard part’, said Tom Caldwell, the head of brokerage firm and wealth manager Caldwell Securities.
“The firms that hang in during the drought, the final ones that are hanging in there tend to fall off right at the uptick,” he warned.
Moreover, those that have survived so far by raising tiny amounts of capital are likely to struggle to do the same going forward.
“At this point, investors aren’t keen to invest in companies seeking just a few hundred thousand dollars to keep the lights on,” said Michael White, head of IBK Capital, a boutique investment bank that helps raise capital for explorers.
“They want to know that the company is out there, doing some good work and creating value.”
The Toronto Stock Exchange and the TSX Venture are home to nearly 60 percent of the world’s publicly listed mining firms. The vast majority are early stage mineral exploration companies that rely on equity markets to fund their drilling and advance their projects.
Many industry executives will meet in Toronto on Sunday for the world’s largest mining sector gathering, the Prospectors and Developers Association of Canada convention, and funding is sure to be a hot topic at the gathering.
A rebound in the price of gold in the last two months is cause for some optimism, since the vast majority of the tiny publicly-listed companies are focused on scouting for precious metals.
Spot gold, which peaked over $1,900 an ounce in 2011 and plummeted down near the $1,180 level at the end of 2013, has risen about 13 percent to $1,334 an ounce recently. Spot silver has risen to about $21.60 an ounce from about $19, since the end of the year.
“A lot of people back in 2013 were predicting metal prices would keep going lower, but we’ve had a bump up and that’s been a pleasant surprise,” said Ewan Downie, chief executive of gold exploration company Premier Gold Mines Ltd PG.TO.
Downie, whose company is well capitalized and in no hurry to tap the market, said the uptick has pushed some generalist funds to consider investing in mining companies again.
“The financing window has opened slightly. I wouldn’t say it is wide open, but compared to where it was last year, companies are definitely in a better place, if they’re looking for money.”
The Reuters survey was conducted in late January and early February, online and on the phone. A random sample of TSX and TSX-V mineral exploration companies were asked to participate.
Because only a small part of the market was surveyed, the results are not an exact representation of the industry. But they should broadly reflect the views of mining companies listed in Canada.
Among the 67 companies that revealed their financing plans, about nine in 10 were at least “somewhat likely” to seek new funding in the coming 12 months, and more than six in 10 were “very likely” to do so. The results are accurate plus or minus 12 percent, 19 times out of 20.
Editing by Peter Henderson and Jeffrey Hodgson