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By Shane Lasley
Mining News 

Juniors struggle to survive financial storm

Small miners adjust strategies as markets melt down; analysts predict half will fail, creating new opportunities

 

Last updated 10/26/2008 at Noon



The financial markets haven't been kind to junior mining and exploration stocks lately. During the past six months, five of Alaska's junior explorers have lost more than three-quarters of their average stock values.

This decimation of junior stocks is not isolated to companies doing business in Alaska and northern Canada, but sweeps the industry across the board. The S&P/TSX Venture Composite Index, which represents about 40 percent of mining companies worldwide, has declined more than 66 percent.

Analysts predict half of all juniors will not survive the financial crisis, but the ones that make it will have less competition in supplying minerals to growing global demand.

A change of fortune

At the beginning of 2008 an atmosphere of euphoria surrounded juniors; gold prices approached $1,000 per ounce, silver and copper hit record highs and investors eagerly poured cash into exploration ventures.

In this environment, everything except for cash was in short supply. In February, juniors attending the Exploration Roundup in Vancouver, B.C., worried about securing enough drills, skilled workers and assay labs, all of which were in short supply for the coming season.

By mid-July, fortunes had clearly reversed. Juniors that normally rushed to tell investors about their latest discoveries suddenly became reluctant to share good news because a spike in stock prices often led to a mass sell-off of those stocks.

A strategic shift

As capital became scarce, juniors began scaling back projects, and the industry adopted a new mantra: "We are focusing on our flagship properties."

Even as it closed in on finally becoming a producer, Novagold Resources Inc. may have initiated a new take on that approach in August when it announced plans to explore "strategic alternatives."

In fact, juniors across the industry are exploring a broad range of alternatives. Their options include mergers, "forward-selling" gold and silver from future production of an anticipated mine, selling off non-core projects, foreign investments, and the old-fashioned "batten down the hatches and ride out the storm," observers say.

Full Metal Minerals, an aggressive Canadian junior that is very active in Alaska, has a business model that puts the company in a good position to ride out the financial storm, Director and CEO Rob McLeod told Mining News recently.

"Since we first formed our company, one of the cornerstones of our business model is to bring in joint venture partners, particularly major mining companies that have the pockets to ride out this type of storm," McLeod said. "We have agreements with BHP, Kinross, Freeport McMoRan as well as just this week we announced another joint venture agreement with a cashed-up junior company (Mosam Capital)."

McLeod said that considering current economic conditions, Full Metal would consider "more than ever now" bringing in major mining companies or large junior companies to jointly explore its other projects that are going to require more capital.

Freegold Ventures Ltd. is also looking at joint ventures as a route to advance its projects.

In an Oct. 17 letter to shareholders, Freegold President and CEO Steve Manz said, "While the capital available in the past few years has allowed us to move all four of our projects incrementally forward by ourselves, in the current market we may look more towards the joint venture model in order to accelerate the exploration of attractive earlier stage targets within our portfolio, and to help minimize equity dilution at these current prices."

McLeod said Full Metal is also considering merger opportunities.

"The other things that I think you will see over the coming months - it is certainly something we have been and would consider - are mergers," he predicted.

Referring to the recent Niblack Mining and Committee Bay merger, McLeod said the combination was a good example of a company with an advanced project and another one with money in the till joining forces.

"I think you are going to be seeing a lot of that in the junior world, and also the late stage development companies and some of the small producers merging to reduce overhead and focus exploration," he added.

Supply and demand

The crisis facing junior miners has implications for mineral commodities as well as the entire mining sector. Exploration performed by juniors is the critical pipeline between prospective properties and proven reserves of the mineral wealth hidden underground. Mining these discoveries is what supplies the ever-growing worldwide demand for minerals. If the exploration companies are hampered in feeding feasible mining properties into the supply chain at pace with global demand, analysts say an increase in mineral prices can be expected.

General wisdom is that the junior stocks should follow the commodities that they are exploring or mining. However, while gold and silver are selling at prices about 225 percent higher than they were five years ago and copper prices are up around 300 percent since 2003, the juniors' stock index is down from 5 years ago.

NovaGold discussed this phenomenon in its third-quarter 2008 financial report. "While gold has appreciated more than 20 percent from one year ago, precious metals companies have traded off with the general market in a major market correction. Management believes that the current share price does not reflect the true value of NovaGold's near-term gold production nor the value of our large strategic development-stage assets. However, because of continued declining world production, we remain bullish on metals prices long term."

Silver lining

The situation has turned into a dwindling-spiral; investors are abandoning junior explorers in favor of less risky investments and without the investment capital, the juniors cannot conduct the exploration required to make the discoveries that will give investors the big returns they seek.

Though this is not a new situation, the unprecedented financial crisis on Wall Street coupled with new commodities investment vehicles - that allow investors to leverage commodities without the traditional risks associated with exploration - may slow the return of investors to the juniors.

Analysts are forecasting the financial meltdown will claim up to half of all juniors. But experts say the dark financial cloud has a silver lining for juniors who can survive. Increased mineral prices are expected in the longer term due to a pinch in the supply line, and investors eventually will return to juniors that can ride out the storm.

While the financial situation is causing juniors to adjust the way they do business, they are looking forward to claiming some of the silver lining in the dark financial clouds.

Manz told Freegold shareholders: "Although the current market conditions are difficult for junior companies, we remain optimistic, continuing to focus on the future, and with our ongoing efforts, expect to emerge from the current market in a stronger position."

Full Metal's McLeod may have summed up the situation best: "Every day that (went) by over the past six weeks or so, things changed, and of course they are getting worse and worse. We will have to see where the commodities bottom out (and) where the share prices bottom out and start rebuilding, like most of the juniors out there."

 

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