Schumpeter's Gale Promises New Funding Models

Issue 33, March 2013

43 per cent of all mining companies carry cash balances of less than $2m, with 25 per cent needing to raise funds in the coming three months, according to data compiled by tax and advisory house Grant Thornton. Separate estimates made by D&D Securities suggest that the funding shortfall is most acute in Canada and amongst explorers, with a quarter of companies on the Toronto Venture Exchange holding cash of less than $100,000.

The slew of negative data was published as the mining industry’s gawkiest rock-hoppers gathered in Toronto this week to admire core samples and marvel at the prospect of undrilled ground at the annual PDAC convention, a presentation bonanza for mining minnows.

“Many exploration companies are really down to the wire,” said Grant Thornton’s Simon Gray. “Right now, the market is looking at these [juniors] as liquidity events and nothing more,” echoed David Palmer, president of Ontario-focused Probe Mines.

The sector’s teeter on the brink of a financing crisis increasingly calls into question the viability of frequent equity raising as its primary funding model; whilst low mining equity prices, a shortage of capital enthused by the sector and too many projects chasing too little money have all been blamed for the shortfall, they are only symptoms of a cash burning model predominant amongst junior miners.

Although hundreds of juniors face insolvency in the coming months, the upheaval will not be without its winners, including alternative mine finance houses and cash rich midtier miners, able to snap projects from bankruptcy courts. Prospect generators, juniors that option targets out, diluting at the project rather than the equity level, will also prove themselves impervious to weak mining equity markets. Importantly, such companies offer investors pure exploration potential without the associated financing risk.

In contrast to the banking sector, Schumpeter’s Gale, the capitalist process of destruction and renewal, will batter the junior mining sector with its full force, producing an industry leaner and more focused on sustainable funding models. “Only the strong will survive,” Ioannis Tsitos, chief executive of Eagle Mountain Gold, told The Globe & Mail. “What’s happening now is part of natural selection.”

“Exploration companies are really down to the wire.”

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