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Mining Minnows Burning Cash Signal More Mergers Coming

Mining Minnows Burning Cash Signals More Deals
The world’s two largest miners, BHP Billiton Ltd. and Rio Tinto Group, are among companies selling underperforming assets to help trim debt. Photographer: Simon Dawson/Bloomberg

Prospectors and mine developers, the lifeblood of the wider $1.5 trillion industry, are running low on cash as funding dries up, increasing the chances they’ll need to consider sales and mergers to survive.

So-called juniors have enough cash to last 5.7 months, according to the median multiple among 1,273 companies with a market value of no more than $500 million, data compiled by Bloomberg show. That’s 25 percent less than a year earlier, according to the data.

The situation facing the juniors will be a hot topic for the 30,000 geologists, promoters and investors expected to attend the Prospectors & Developers Association of Canada convention, the world’s biggest mining gathering, which started yesterday in Toronto.

Smaller companies probably will seek to merge, or they may “just cease to exist,” said Dan Barnholden, a Toronto-based investment banker at Cormark Securities Inc.

“We’ve been counseling guys to manage their treasury very carefully because there really isn’t a lot of money out there,” Barnholden said last week in a telephone interview. “It’s sort of desperate times here now.”

Stock sales, one of the few options available to smaller companies to cover costs and advance projects, fell in 2012 for a third straight year, according to Bloomberg data. Canadian mining companies raised $726.8 million in equity and equity-linked financings this year, 45 percent less than the year-earlier period.

‘Hit the Wall’

“The capital markets have been largely shut down for the juniors,” said Mitchell Krebs, chief executive officer of Coeur d’Alene Mines Corp., which agreed last month to pay about C$373 million ($363 million) for junior miner Orko Silver Corp. “You will see a lot of companies hit the wall in 2013.”

QMX Gold Corp., which has projects in Quebec and Manitoba, in May lined up a $45 million loan for its Snow Lake project that was conditional on raising funds from a stock sale. The Toronto-based company is now approaching “non-traditional” funding sources such as private equity as public investors remain reluctant, said CEO Francois Perron.

“The equity is more afraid than the debt lender, that’s how difficult it is,” Perron said in a phone interview last week. “I’ve been looking for equity for the last 12 months.”

Possible Consolidation

The lower level of funding, which has helped depress company valuations, makes conditions “conducive” to consolidation in the industry, said Rob McEwen, the founder of Goldcorp Inc. who is now chairman and CEO of Toronto-based McEwen Mining Inc. He’s seeking purchases to add about 300,000 ounces of annual gold output by the end of 2015.

Given the outlook, the juniors also are looking at unorthodox financing options such as selling future revenue streams for cash advances, and in some cases slashing spending to conserve cash.

“As access to capital has dried up at this end of the spectrum, we see a large number of juniors being challenged to continue,” analysts at Dundee Capital Markets said in a Feb. 28 note. Small-cap or junior developers may sell their assets at below net asset value, or look to merge with “rarer” cash-rich juniors that lack flagship projects, they said.

Miranda Gold Corp., which has exploration prospects in Colombia and Nevada, is looking to acquire assets “on the cheap” as companies face financial difficulties, CEO Ken Cunningham said.

‘Buying Opportunity’

“We are doing a search right now for companies that have less than a half a million dollars in their treasury,” Cunningham said last week by phone. “A lot of companies are wanting to finance and they are finding that there aren’t very many people to talk to.”

Some companies are still able to access funds. White Rock, British Columbia-based Miranda raised C$5 million in a private placement in December, while Vancouver-based Panoro Minerals Ltd. expects to close a C$15 million share sale in the middle of this month.

The money that Panoro is raising, together with existing cash, will fund its plans for about 18 months to two years, CEO Luquman A. Shaheen said.

“It’s going to be survival mode for smaller companies with little capital, and a buying opportunity for those companies who are capitalized and looking to pick up new projects at probably very cheap valuations,” Shaheen said. “We should see a number of transformational changes.”

Private Equity

Companies that still may be in the hunt for assets include private-equity firms, said Ken Hoffman, an analyst at Bloomberg Industries who is unveiling a tool that values mine-company assets at PDAC this week.

“Metals and mining is very interesting to these guys, just because of the horrendous performance of these shares, and so I think these guys will look at going and taking some one-mine companies and two-mine companies private,” Hoffman said in a phone interview last week.

Valuations in the mining industry have declined amid soaring costs and about $50 billion of project writedowns in the past year following expensive takeovers. The 122-company Standard & Poor’s/TSX Global Mining Index has fallen 20 percent in the past 12 months, compared with a 0.5 gain in Canada’s benchmark S&P/TSX Composite Index.

BHP, Rio

The world’s two largest miners, BHP Billiton Ltd. and Rio Tinto Group, are among companies selling underperforming assets to help trim debt.

Although valuations are attractive, the biggest companies aren’t in buying mode, McEwen said.

“The seniors are frozen right now, they are like deer caught in the headlights of a car at night,” McEwen said in a Feb. 25 interview. “The majors as a group will be very resistant to the thought of buying someone in the near term.”

Still, there are some large companies, including Hong Kong-based MMG Ltd. and Newmont Mining Corp., the world’s second-biggest gold producer after Barrick Gold Corp., that say this is precisely the right time to be looking for deals.

“Everyone seems to be running away from it now and looking at selling off assets,” Newmont CEO Gary Goldberg said in an interview Feb. 25. “That’s the time to look in the opposite direction from the herd to see what opportunities might be out there.”

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