U.S. credit woes and European debt concerns took Howe Street investors on a wild ride last week as junior companies shed market value at rates reminiscent of the 2008 financial crisis.
The TSX Venture Exchange, the life force behind Vancouver’s pool of 800 junior mining companies, jettisoned 7% of its value after markets opened last Monday following news that the U.S.A.’s credit rating had been downgraded to AA+.
The Venture had lost 18% of its value by market close August 8 compared with a recent high of 2,059 on July 22.
That’s compared with a 14% drop in the value of the big board TSX Composite Index over the same period.
The market volatility wiped out billions of dollars of investor value for large producing companies and junior explorers alike, but one investor believes the juniors will have a more difficult time clawing back to positive territory than their revenue-positive cousins.
“Anyone who has to raise money is facing a significant challenge in the near term, and that encompasses a lot of, if not all, the juniors that aren’t in production yet,” said Stefan Ioannou, a mining analyst with Haywood Securities.
The challenge for juniors is that they rely on issuing shares to investors to raise money to fund their operations, which makes them inherently more risky than companies that have a steady source of income from mines already in production.
Michael Jones, a prevalent face in Vancouver’s junior mining scene and co-founder of Platinum Group Metals (TSX:PTM) and MAG Silver (TSX:MAG), believes the volatility will be short-lived.
But he also said it could force early-stage companies to offer bigger discounts on private placements needed to continue funding their operations.
“Companies that are forced to try and raise money in this immediate market are going to have a very difficult time,” said Jones, whose Platinum Group Metals had, fortunately, closed a $260 million loan agreement with several banks on August 2.
Michael McPhie, president and CEO of copper explorer Curis Resources (TSX-V:CUV), said there’s a tremendous “disconnect” between the actual supply-demand fundamentals of the metals market and the volatility in the public markets.
“Obviously investors are getting a bit spooked by what’s going on, but the underlying fundamentals supporting copper are tremendous, and we expect those underlying prices to continue,” said McPhie.
He also believes the drop in stock prices has created a buying opportunity for investors who missed out on bargain-basement deals in the aftermath of the financial collapse.
Ioannou agreed the sell-off has more to do with market paranoia than any change in commodity fundamentals.
Still, he believes junior companies are going to have to work extra hard to get their stories noticed in the marketplace in the near term.
“Unless you have hit the ball out of the park with exploration results, you’re not going to get a lot of attention for average-type news,” said Ioannou. “So in the very near term the advice would be making sure you conserve your cash.”
For Jones the lesson is simple: junior companies should’ve raised money when they had the chance.
Said Jones: “The moral of the story is take tea when it’s poured, not when you have to have it.”