Small miners between rock and hard place
Allan Seccombe
IF IT’s tough going for established mining companies in the prevailing economic, social and labour environment, it is exponentially more difficult for junior companies either starting off with a hope, a dream and an undefined mineral resource in the ground, or relatively small projects.
At the Junior Indaba, a rare conference dedicated to the junior mining and exploration sector, speaker after speaker told about 200 delegates of the battle to win over investors, secure cash, cope with regulations designed for larger companies already in production in a market awash with scepticism about the ability of smaller companies to advance drilling programmes, define mineable reserves and to build mines on time and budget and then to run them profitably.
The key problem with the conference was that the delegates drawn from the junior companies, service providers and financial institutions were largely talking to themselves about issues they all understand intimately, leaving it to the conference chairman and former Harmony Gold CEO, Bernard Swanepoel, who built a top-five gold company from a single mine, to take the messages to Mineral Resources Minister Ngoako Ramatlhodi.
For these junior companies, SA is especially difficult when it comes to considering a listing to raise funds, with little to no interest from investors for an early stage exploration firm that absorbs cash for years, with the risk of no returns if the deposit turns out to be a dud.
It is very difficult to value a business in the very early stages of exploration because no real mineral value has been defined and quantified.
“Essentially, you have a high-risk sector with the biggest returns. You put your dollar down, you should get back $10 or $100, if you’re extremely lucky,” says Tony Harwood, CEO of Montero Mining and an economic geologist with 30 years of experience under his belt.
“You can be as clever as you like but you really want to find a lucky geologist or lucky entrepreneur to find you your riches if you want to make your money in this sector.
“In the first part, the exploration phase, you are essentially dealing with gamblers in the business ... they are gambling on my intelligence and experience to make them a lot of money,” he says.
Funding for projects in Africa between 2013 and this year came primarily from Canadian investors, who stumped up $1.5bn for 103 projects. Australian’s injected $503m for 153 projects, while South Africans provided just $286m for 24 projects, Mr Harwood says.
Rand Merchant Bank’s Henk de Hoop says funding is available for known deposits, but it is extremely difficult to fund very early stage explo- ration. Noah Greenhill, who once headed marking and business development for the JSE, says the local appetite for risk and incentives to invest in the junior sector is extremely low, forcing companies to go to other jurisdictions to raise capital. “Perhaps we need to take a much harder look at proper tax incentives for investing in the junior sector. It grew the market in other jurisdictions and we sat watching the game, not playing it,” he says.
Keith Scott, MD of MSA, a mineral exploration and evaluation consultancy, says that while Africa delivered a high percentage of mineral discoveries, coming a close second to Latin America since 2010 and yielding the most large mineral deposits, the conversion of these discoveries into mines in relative- to low- risk countries is low.
There is a lot of competition among juniors to secure funding from institutions willing to invest in exploration, but the hurdle rates are a lot higher than they were a decade ago.
The days up to 2007 when companies could raise investments to explore “moose pasture”— a Canadian term for a worthless mining claim — are gone, says Sacha Backes, senior investment officer at the World Bank’s International Finance Corporation.
Investment executive at Pangea Group Boris Kamstra says: “Mining is a high-risk, high capital-intensity and very long-term investment. You are asking people to make a call on 20 years.” He says there needs to be legislative certainty and a stable environment.
In the first part, the exploration phase, you are essentially dealing with gamblers in the business