As Africa punches above its weight as a mining investment destination, it both attracts and competes with WA miners.
As Africa punches above its weight as a mining investment destination, it both attracts and competes with WA miners.
There is little doubt the gusto of Australia’s mining boom is waning, with big iron ore players such as Fortescue Metals Group and BHP Billiton announcing cutbacks or deferring key projects.
But if things are tough at the top end of town, spare a thought for the junior players.
Disappointing commodity prices have forced juniors with cash flow to tighten their belts amid narrowing profit margins. And low investor confidence is inhibiting their ability to raise capital for both new and existing projects.
It has prompted a renewed focus by juniors on more stable commodities such as gold, projects in less developed countries where operating costs are lower and has opened the door to a revival of mergers and acquisitions.
Africa has become a popular destination for resources investment among juniors and is a trend expected to continue. The overwhelming majority of the 2,500 delegates at the Africa Down Under conference held in Perth recently expect investment in Africa to continue on its upward trajectory.
One country expected to see significant growth is Burkina Faso, where juniors have been encouraged to snap up tenements because of a stable regulatory environment and the potential for high-grade gold discoveries (see Smaller players exploring and developing golden opportunities in Burkina Faso).
One of those is Ampella Mining, which has set 2014 as the date it plans to begin production from its Batie West gold project.
Resources consultancy MinEx Consulting estimates the average cost of making a greenfields gold discovery as almost 400 per cent more expensive in Australia than in Africa – about $74 per ounce compared to $15/ounce.
It’s a comparison which Ampella managing director Paul Kitto told WA Business News vastly increased Africa’s allure when combined with the country’s relative stability.
“If you’re going to explore anywhere the cheapest place to explore or discover is Africa … it just makes sense that we take the knowledge we’ve already gained in Australia and take it elsewhere,” Mr Kitto said.
Lower operating costs were not the only reason juniors were turning to Africa; companies also reported faster time frames in getting mining permits and more opportunity to secure tenements which were not already owned by major miners.
Association of Mining and Exploration Companies chief executive Simon Bennison said about 50 per cent of the capital raised in Australia was being invested in offshore projects – a statistic which was concerning for the future of Australian mining.
“There’s a whole suite of issues that encourages companies to go offshore and it doesn’t have to be South America or Africa; we have companies going to Scandinavia that get terrific support from the government,” Mr Bennison said.
“People, particularly politicians, unfortunately forget that we live in a very, very competitive global environment when it comes to the development of resources and you just can’t set policies that suit the agenda of the particular government of the day.”
West Africa, particularly Burkina Faso, is also considered to offer more potential for high-grade gold discoveries, which has provided an upside to juniors entering the high-risk exploration market.
Grant Thornton partner corporate finance Holly Stiles said focusing on gold had also given juniors a bit more stability because it was more resilient to market fluctuations than other commodities.
It meant gold-focused juniors were likely to have more success in attempts to drum up investor support.
“If a company’s flagship resource is gold then that’s more attractive, so they are better positioned to attract investment,” Ms Stiles said.
“But for companies that have projects with commodities that are a bit out of favour then it is more of a challenge.”
Companies with a nickel focus, for instance, are likely to be having a more difficult time.
In the past year nickel prices have fallen by about 26 per cent, while the reduction in the value of gold has been only about 9 per cent. Central banks have also been buyers of gold as they seek protection from economic uncertainty – a trend that bodes well for the future price of the precious metal.
KPMG Australia partner Helen Cook reinforced the view that juniors relying on assets other than gold were likely to have a more challenging road ahead.
“There is some pain in the market and we’re certainly seeing some of the smaller players – particularly ones with just one project – struggling to manage in this environment and having to make decisions about delaying projects or putting them on hold.”
The result has been a decrease in the level of activity among junior miners as they tick along in cash-preservation mode.
The low-key level of activity in anticipation of market recoveries was largely expected to continue in the short to medium term but KPMG corporate finance partner Greg Evans said juniors with a bit of money in the bank could use it to improve reserves and resources.
“I think we’ll see some different decisions made over the next six months … it may be more about increasing reserves and resources before they go back to the capital markets; we may even see an increase in spending on exploration and less on building processing plants and the like,” Mr Evans said.
But time is running out for juniors sitting on projects without the cash needed to develop them.
Grant Thornton’s Ms Stiles said it was likely to prompt an increase in the number of early-stage projects being put up for sale and hence more acquisition deals being negotiated.
“A lot of junior exploration companies are trying to position themselves better and appear more attractive by divesting earlier-stage projects to instead get some more advanced projects,” she said.
“But that is very difficult to do because everyone has a preference for the more advanced assets.”
The tight equity market and dwindling cash reserves have also increased the probability of junior companies leaning towards accepting merger proposals.
A takeover deal between Silver Lake Resources and Integra Mining, and Regis Resources’ $150 million acquisition of the McPhillamys project in NSW, have stirred up speculation around the resurgence of M&A activity.
The deals suggest ‘push may be coming to shove’ for some but this year is still tipped to be one of the quietest periods on the M&A front (see Miners keeping purchase powder dry but buying spree tipped).
Analysts agree such deals will become more prevalent.
Simon Bennison said mergers and acquisitions were often an attractive option for juniors.
“It doesn’t have to be an aggressive takeover; like the Silver Lake and Integra acquisition – that’s a win for the company and the shareholders,” Mr Bennison said.
“Sometimes companies reach a stage where they don’t mind being picked up by a suitor so they can leverage that sort of deal.”
M&A activity is being held up by cashed-up companies taking a cautious approach around decisions on where to inject their capital.
Companies at the lower end of the scale are also taking a pragmatic approach. The slow to non-existent IPO and secondary capital-raising activity shows junior miners have accepted that getting investors to support emerging projects would be akin to getting blood out of a stone.
Earlier this year Austrasia International Mining withdrew plans to list on the stock exchange, while others, such as Victory Mines, have been forced to extend their IPOs or accept lower share prices.
Despite investor reluctance, Deloitte WA managing partner Keith Jones echoed a general consensus that equity could be raised in the current environment but only for standout projects.
“There have been some placements and those placements are usually where a project is a very, very attractive proposition and the investors see it as a project which will be developed,” Mr Jones said.
An example is market bolter Sirius Resources’ oversubscribed $7.6 million placement last month.
The company’s share price rose by just under 700 per cent in one day of trading in July after it announced the discovery of a nickel and copper sulphide deposit at its Fraser Range project in the eastern Goldfields.
The subsequent placement of 10 million shares proved equity investors were still capable of stumping up cash for the right project.
More innovative funding arrangements are likely to dominate in the coming year for companies running out of money and looking to advance more mature projects.
Ms Stiles said a recent UK deal where resources investor BlackRock paid $110 million for London Mining’s 2 per cent mining royalty was the type of innovation companies could begin to look at here.
KPMG’s Mr Evans said it was becoming more common for hedge funds to propose physical gold lending.
“Large hedge funds are actually setting up funds to loan to junior and near producers in exchange for physical gold that they’re then able to take at a discount to market and sell at spot prices,” Mr Evans said.
He said strategic partnerships with larger companies were also likely to become more common.
“Another trend we’ll see in the next 12 months is companies with processing plants becoming the ‘kings of the castle’; they’ll be able to do deals with other companies around them that were hoping to go into production with their own facilities,” he said.
Emerging Kalgoorlie producer Carrick Gold has just entered into such an agreement with Saracen Mineral Holdings.
Under a two-year contract Saracen will allow Carrick access to its Carosue Dam mill for a fixed fee per dry tonne of ore treated. The deal enabled Carrick to commit to a mining start by January next year.
Southern Cross Goldfields’ takeover of Troy Resources’ Sandstone mine is also a strategic transaction, which has enabled Southern Cross to start production from its Marda project without building its own processing infrastructure.
The $5 million purchase included Southern Cross acquiring the Sandstone processing plant, which it plans to relocate and use to process the Marda ore.
Other strategic partnerships could include off-take agreements.
There’s little concern that commodity prices and investor confidence won’t recover over time. The question is just when that will be and how many juniors will be forced to pull the plug before it does despite holding projects which would normally be considered viable in a more confident market.
