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"We haven't really seen the markets for junior companies to raise significant capital open up yet"

Stefan Ioannou

Mining analyst/Haywood Securities

Published  Friday, October 9, 2009

As talk of the global economic crisis turns more toward recovery, there is at least one sector that is still living in a credit crunch: junior mining. Many explorers and developers are facing tough times when it comes to their balance sheets, reducing activity to save cash or entering into partnerships they might not have considered otherwise. Some analysts and miners say the problem is not so serious for gold projects and it is the base metals explorers who are suffering the most.

BNamericas interviewed Haywood Securities mining analyst Stefan Ioannou, who focuses on mid-cap base metals stocks, to get his take on the situation and what is to come.

BNamericas: Base metals prices have been returning to strong numbers over the course of this year, but capital markets for junior companies seem weak still. What is your take on the situation?

Ioannou: I think really the big issue facing the developers, as opposed to the producers, is the capex hurdles that they face. South America is no exception. There are a lot of good projects there that prior to the credit crunch had gone through full development, in terms of exploration through resource and reserve drilling, and even feasibility studies. There are a number of projects where they got to the point, let’s call it last [northern hemisphere] summer, where the feasibility study was complete and the next step was to raise the money to build the mine and we hit the credit crunch and that next step was basically impossible. And we haven't really seen the markets for junior companies to raise significant capital really open up yet.

BNamericas: What role would you say metals prices are playing?

Ioannou: I think it’s definitely got the attention of the general market in terms of looking at these projects again. In the fourth quarter of last year base metals in general were just a bad word and no one wanted to hear anything about them. With metals prices rising people have regained focus and realize there is some value there.

BNamericas: Partnerships and other deals have always been a way for juniors to advance their projects, but it seems that nowadays these are even more common. Is this a sign of changing capital strategies in the face of the credit crisis?

Ioannou: The traditional straight equity and/or straight debt routes aren’t open right now, so they’re looking to more creative mechanisms, and one of them is through JVs and/or off takes. Whether it is with Chinese smelters or larger scale entities - they’re effectively selling a percentage interest in the project to the company, and in return that company pays its share of capital costs and maybe also gets some sort of off take from the mine. We’re definitely seeing the importance of partnerships and/or off takes really coming into the picture. A junior with a US$25mn market cap that faces a US$750mn capex - that isn’t going to happen in this market. If they can bring in a partner that can fund a significant part of that capex, they can bring it down to a level that is at least somewhat more realistic going forward. And once you have that partner in place, traditional bank debt would arguably be a little bit easier as well in that the bank has the comfort level of a significant partner backing the project.

BNamericas: When do you see a turning point coming?

Ioannou: I would argue that base metals have had a pretty good run already this year, most of that off the back of significant demands around January and they [China] have done a lot of buying. My biggest concern is that in the short term we’re going to see that buying slow down and there aren’t a lot of other countries out there that are going to pick up the pieces in the short term. So if anything I think we’re probably in store for a modest correction going forward, and longer term I think the outlook is still pretty strong, especially as we see some of the global stimulus packages start to pick up.

[However], we could arguably see another 12-18 months or more before we start seeing those stimulus packages have an impact on global demand. So really it’s still a sort of one-legged stool right now with China supporting it. As China pulls the plug on its spending there’s really no one else to hold that stool up in the short term.

BNamericas: So there’s a pretty big window of opportunity left open for larger companies to take over or partner with juniors, and a lot of juniors are going to have to sit tight?

Ioannou: I think so. I think the juniors have to be comfortable or at least be in a position where they can sit until early 2010 at the very minimum before they get serious about raising capital.

BNamericas: Looking at the Toronto Stock Exchange's venture market, what has been the activity of junior mining stocks over the past few months?

Ioannou: They’ve been relatively flat. Probably in the first six months of this year, the companies that were in a lot of trouble and maybe didn’t have the best projects have been weeded out. The survivors that are there now - that have balance sheets to last them for roughly the next 6-12 months, with decent projects - have been recognized and I think they have seen their value pretty much maintained.

Having said that, they also haven’t gone up with the copper price. So they’ve been in a holding pattern for now and I think they’re waiting for money to come from a producer… which I think will eventually happen, but we need to get a few big financings under our belt for the market to really get comfortable with that idea and move forward on it. It’s going to take some time.

[For a deeper look into the state of junior financing, see BNamericas' October Mining Intelligence Series report, which will be published later this month.]

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