Myr­iad hur­dles di­min­ish ju­nior min­ers’ chances

Finweek English Edition - - IN THE NEWS - BY DAVID MCKAY

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.

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