Myriad hurdles diminish junior miners’ chances
Owing to the highly speculative and risky nature of the search for tomorrow’s minerals, investing in South Africa’s junior mining sector is best left to the professionals. There’s a number of reasons for that.
Mineral exploration is never quick or easy; it is riddled with unknowns, and the companies that are involved in it are always a bad winter away from insolvency. Even companies with good projects can end up victim to a bad market such as now when the world is long on metals, and demand and capital have fallen badly away.
And i f any f urther evidence i s required, not even the professionals fancy South African exploration shares much. According to Peter Major, a mining policy consultant for Cadiz Corporate Solutions, exploration companies aren’t to be trusted in the main.
He responded to a question at the recent Junior Indaba conference in Johannesburg as to why start-up exploration firms always did so badly by making the facetious remark: “Juniors haven’t failed. Juniors milk the suckers.”
The ev i dence i n t er ms of JSE performance is not overwhelming either.
A quick scan of the JSE stocks pages shows that in the current market, a slew of exploration and development firms have required urgent recapitalisation: Coal of Africa, Waterberg Coal Company, Miranda Minerals, all in coal. Others, such as Tawana Resources and Bauba Exploration, had changed management or focus, or both. So why bother? Well, when exploration companies do find something, in the right market, the returns can be stratospheric.
Eland Platinum sold its prospect to Xstrata for $1bn. Australian-listed Riversdale sold its coking coal prospect to Rio Tinto and Indian conglomerate Tata for $4bn, while the world’s best-known mining entrepreneur, Robert Friedland, discovered the Voisey’s Bay nickel deposit in Canada and sold it to Inco for $3.1bn.
There are also good reasons why an economy needs junior mining, especially in SA where there’s a strong history of mineral activity and a need for job creation.
According to industry commentators, however, there are too many historical, regulator y and i ndustr y obstacles preventing t he t ake- off of j unior exploration firms.
SA’s history of conglomeration – Anglo American and Gencor for instance – means investors don’t really have much of a track record with exploration firms; they’re more familiar with strongly capitalised big players that either conduct their own exploration, or buy up juniors with good prospects.
Paul Miller, a resources banker at Nedbank Capital, says it’s also worth noting that more exploration companies sit outside the Chamber of Mines than within it, while the South African Mining Development Association (SAMDA), an organisation established specifically for junior mining, has fallen into disrepair.
Worst, though, are the regulatory headwinds. According to Otsile Matlou, a director at law f irm ENSafrica, the current regulatory framework has been designed for existing mining companies, not for mines that will exist in the future.
“Exploration companies have to deal with 203 different statutes which, for them, is like starting at technical noncompliance even before you start,” said Matlou. “There would be benefit from the development of bespoke rules that only speaks to that industry.”
Reg u l a t or y u ncer t a i nt y wit h empowerment rules in SA isn’t helping. “The risk profile of SA has increased because of everything that has happened,” said Sacha Beukes, a senior investment officer at the IFC, the finance arm of the World Bank.
Perhaps the most damning of all statements was uttered by Miller, who commented on t he sinister side of government relations. “You have to take your battery out your cellphone because they’re suspicious you might record meetings with your own company.”
“You have to meet people in hotels in Midrand to resolve prospecting right disputes. You have to go to Middelburg to speak to people in coffee shops because there’s a back door to the department,” he added.