Mining Soldiers on During Difficult Economic Times
The past four years have been a colossal struggle for most mining companies, and even more so for juniors who depend almost exclusively on raising exploration capital through the international stock markets. While there have been exceptions to the rule, the mining industry has felt the effects of a prolonged global downturn, much like other business sectors.
Throughout the calendar year, a number of smaller companies have been forced to shelve plans to aggressively pursue exploration projects due to skittishness on the stock markets. It’s evident the markets are reacting with negative caution to the ongoing economic uncertainty and there are fears commodity prices will tumble again like they did in 2008, although that has not transpired to date with prices still quite high across most of the board. Many small to medium-sized companies in the larger mining countries have been noticeably affected, including the likes of Canada and Australia.
Within the past month, major outfits have announced plans to shelve huge projects due to a lacklustre international economy. BHP Billiton of Australia, the largest miner in the world, was forced to postpone its $40-billion hostile-takeover bid of Potash Corporation of Saskatchewan on concerns it would not result in a net benefit for Australia. BHP shelved a total of $80 billion in expansion plans, including the $28 billion for Olympic Dam and the $20 billion development that had been earmarked for Port Hedland’s outer harbour. The drastic moves by BHP, all announced within a span of a week, precipitated Australia’s resources minister Martin Ferguson to state that the Australian mining boom was over. No sooner had he made the alarming statement when other ministers and officials within the Australian government began expediting damage control for what were ill-advised comments from such a high-ranking government official.
Juniors Fight to Survive
The mega-miners have the ability to sustain themselves even during long downturns. But it’s not the same for juniors. But if there is an area where those outfits have a degree of leverage is that they are, for the most part, undervalued and have a lot of room for growth if they can withstand the current doldrums.
It could also possibly make them attractive for buyouts by the bigger firms.
“These are tough times for the junior sector,” acknowledges Pierre Gratton, President and CEO of the Mining Association of Canada. “They faced something quite similar in 2008 when it was very hard to raise money and then things started to come back. Unfortunately there is once again a lot of skittishness on the markets.”
Paramount Gold is an American exploration and development company with roots here in Canada, including an office in Ottawa. Paramount is an example of a junior miner that has thus far weathered the storm quite nicely and in late March finalized a $21 million round of financing for its operations.
A preliminary assessment of Paramount Gold’s Sleeper Project in Nevada returned a great deal of optimism with the study predicting a 17-year operation with average annual gold production of 172,000 ounces.
Although the global economy impacts on virtually every industry, Canadian mining has proven to be exceedingly resilient, which is great news for this country, as it’s one of the key driving forces of our economy. Mining investment this year has been increased for capital spending to the tune of $16 billion, which is closing in on the $20-billion figure Canada invests in all of its manufacturing industries combined.
Focus Graphite, formerly Focus Metals, is an example of a junior miner that continues to perform well even under adverse international economic conditions.
The Ottawa-based company is led by president and CEO Gary Economo and has a market cap of about $63 million. Focus Graphite owns the highest-grade (16 per cent) technology graphite resources in the world. One of the company’s primary goals is to achieve a dominant industry presence and leadership by becoming the lowest-cost producer of technology-grade graphite. The name change was precipitated to more accurately reflect the branding and work-related aspects of the company.
Many successful companies in the mining industry have found themselves a niche market, which seems to serve them well and yield strong results. It’s a notion shared by Focus Graphite Director Chester Burtt.
“In our space, we saw competitors pinpointing their focus so in our case it made more sense to focus it,” he says. “In today’s day and age, with the costs that are involved in mining and competition for investor dollars you have to be very specific in what you do and what your messaging is.”
One key element for the vast majority of mining companies is how receptive the stock markets are at any given time, as they, more than anything else, determine the ability to raise capital funding for a project. The tighter the market, the more difficult it becomes if there is not a solid economic base for a project.
The global economic downturn took effect in many countries as far back as 2008 and has been quite relentless ever since, despite some nations showing signs of pedestrian recovery. It’s Burtt’s opinion that the markets are even more unstable now.
“I think it’s more skittish now because I think investors have become far more conservative and are thinking twice before making an investment,” he states.
There is still a lot of money sitting on the sidelines, but the willingness to pull the trigger on a project comes with a lot more guarded decision-making. In the case of Focus Graphite, they are sitting in a stronger position than many other companies.
“We have such a compelling story and we shine in tough times,” Burtt continues. “We’ll have the lowest cost of production graphite mine in the world. We’ll have a cash cost at the mine of about $350 and our competitors have a cash cost of $900 to $1,000, so we can withstand a serious downturn and still be very profitable. I think when investors look at that, it should be a no-brainer for them in terms of where they’re going to put their investment dollars.”
As so many intangibles play a factor in the success of the industry, there is simply no way to gauge when an upturn or a downturn is going to occur, or its duration. What companies can continue to do is get their story out to the public, displaying a good strategy and an execution plan and hope that an investor will be intrigued while weathering the storm.
There’s no doubt that Burtt believes Canada is at the top of the list when it comes to this country’s experience and success rate internationally and part of the reason is the commitment from government.
“I like to think we’ve got the best mining jurisdictions in the world,” Burtt notes. “The partner in our Rare Earth project is the Quebec government.”
Currently the vast majority of work projects of Focus Graphite are taking place in Quebec, but they do have interests elsewhere.
“We do have an earn-in joint venture with Lara Resources on a graphite play in Brazil,” Burtt reveals. “We just signed that several months ago so that’s still two or three years off.”
Another junior miner that has managed to withstand the perils of a shaky world economy has been Angkor Gold, which focuses its attention on Cambodia. In a discussion with CEO Mike Weeks he told CBJ that a number of companies do face hardships in trying to raise capital with the markets in such a flux. However, he made it clear that Angkor Gold is doing just fine, despite many international problems facing the industry.
“I have lots of friends doing explorations in various part of the world so they’re not competing with us in Cambodia and it’s really tough out there,” Weeks says. “I like to say we have Plan A, B, C and D and we have a very good investor base and people that believe in what we’re doing in Cambodia that are pretty solid investors and that’s really helped us.”
A big part of the success for many mining companies is not just seeking capital investment, but seeking smart capital investment – those investors who will be in it for the long haul and not expect to see immediate returns, or panic when quick results aren’t achieved.
“We tell everybody if you want a quick inv
stment or if you want a guaranteed investment look somewhere else,” Weeks continues. “We think with us there’s going to be big returns but we’re still a year-and-a-half to two years down the road at least and put some money in that you can afford to sit on and hope we do what we are committed to do. You can’t build on hype – you have to build on a good product. ”
One noticeable difference between Focus Graphite and Angkor Gold is targeted specialization within the industry. While Focus Graphite and many other junior miners have taken the approach it’s more advantageous to target one aspect of the industry and excel that way, Angkor Gold takes the corporate approach that more is better.
“Our VP of exploration has a PhD in geology and is 68 years old and believes in doing it the old way and covering a lot more ground and opening up a lot more opportunities than just focusing on one small area,” Weeks reveals. “We’re still able to find the money to do that because we believe for one thing that if you prime on one area you cut down your odds.”
As proof that diversification is working well for Angkor Gold the company has 10 prospects spread over 2,800 km.
“The brokers tell us just to focus on one, but we’re not,” Weeks states. “We believe that we can hit on three or four by going after the nine or 10 as long as we can continue to raise money to do that.”
What it really boils down to is the individual company and its ability and willingness to take on various risk factors versus the odds on what returns will come in.
“Our philosophy is that if we can hit in one area we want to continue at what we do best and that’s explore and develop land holdings in a country that we think is very underexplored and possibly joint venture on a find in one area and continue in others, so it’s a different philosophy for sure.”
Weeks is also of the belief his company is in an excellent position in terms of government rules and regulations, especially with their exploration in Third-world countries.
“People look at Canada as a leader and also we follow Canadian environmental rules, which they’re happy to hear, so if anything, it’s a benefit,” Weeks confirms.
Cambodia has been the hotspot for Angkor Gold and Weeks is of the belief that’s where the company will be for the foreseeable future.
“We believe Cambodia is going to explode like Colombia did a few years ago,” Weeks continues. “We’re the first Canadian company in there with our large land holding so we think we should stay with what we believe in.”
Economic Woes Affect Big and Small
Of course it’s not just the juniors who have been experiencing a bumpy ride during the global recession. The well-established Vale of Brazil recently announced the postponement of a $3 billion potash expedition in Saskatchewan, which puts the brakes on 1,500 construction jobs and an estimated 500 permanent jobs.
No sooner had that been announced when the world’s largest miner, BHP Billiton of Australia, revealed it was shelving projects due to a lacklustre global economy. Included in the postponement was a $28 billion expansion for Olympic Dam and the mothballing of a $20 billion project to develop Port Hedland’s outer harbour as well as Peak Downs.
BHP Billiton CEO Dr. Marius Kloppers has publicly stated he believes commodity prices could still go much lower and noted that current spot prices are above BHP’s long-term targets for all of its largest commodity profit makers including oil, coal, copper and iron ore.
Taylor Thoen is the CEO, founder, executive producer and host of Business Television. She notes that the reasons are quite different as to why established companies are putting projects on hold as compared to many junior miners.
“I think why some of the larger projects are getting stalled or put off is because there’s an economic uncertainty globally speaking,” Thoen says. “These are big projects to be financed and I think that’s what’s hinging and in some cases it’s a supply and demand issue within a commodity. Some projects are being stalled but some other larger projects in the precious metals sector are moving forward.”
Juniors are far more reliant on raising capital from the stock markets, which have been skittish to say the least. Because of the ongoing uncertainty, 20 per cent of Canadian mining companies have been forced to lay off some of their employees as they struggle to survive. If there’s any good news from all of this, a recent poll of 140 mining executives revealed that 76 per cent don’t plan on any further personnel cuts this year – assuming of course the conditions don’t worsen any further. Thoen is optimistic that a turnaround is near.
“We’re starting to see the markets tick upwards, as they normally do and I don’t think we’ll see more in the way of layoffs,” she says. “But it was inevitable (the layoffs). It was a frenzy over the last couple of years; that doesn’t last forever, it never does in any sector. We had a long frothy period, which only means it has to slow down and that’s what we’ve just seen – a slowdown and a bit of a correction. I actually see the markets turning.”
Further to the situation on the stock markets, Thoen believes the upswing will continue through the remainder of this year and into 2013, although there will be some differences in terms of how companies go about raising capital.
“My prediction is that companies that are at very early stage exploration will have a more difficult time raising funding,” Thoen reveals. “Companies that are more in development and heading into production will have an easier time. As a comparable to last year, it was very frothy and in early, early stage and I think that you’re going to see a slight shift in that and a little more conservatism moving into the fall.”
The most immediate pressure would seem to be on those companies working in the early stage of the sector, because they need to continue raising capital to keep the exploration process moving with such things as site drilling. A survey by The Mining Recruitment Group of Vancouver found 60 per cent of all early-stage mining companies have an average of nine months worth of cash on the books in order to keep moving ahead before needing additional funding.
“Those early stage guys raise their money, they spend it on drilling and exploring and they have to keep doing that over and over again and if they have a discovery they take it to the next step and they’ll need more financing to get to the next phase and with feasibility you need even more financing, which is why these companies are publicly traded – they don’t have any revenue that they’re generating,” Thoen continues.
Overall, the resources sector brought in about $57 billion to our national economy last year, which accounts for just less than 4 per cent of our entire gross domestic product. Of that total, about $5.5 billion is sent to the government via taxes. Thoen says the one area where governments might be able to speed up the process for companies is with respect to permitting.
“I do see holdups at that particular junction with a lot of companies out there,” Thoen states. “If they (government) could expedite that process, either a yes or a no, but expedite that process I think it would be very helpful.”