According to a PricewaterhouseCoopers LLP mining survey, the gross revenues derived from mining in British Colombia rose 25% year-on-year in 2011 to C$9.9 billion, predominantly attributable to higher metallurgical coal prices and more coal shipments.
The mining sector in British Colombia employed more than 9,000 individuals directly in 2011, a 14% increase year-on-year. Vancouver (and British Colombia) remains a global leader in mineral exploration expertise from technical capacity to financing.
The Mining Association of Canada indicates that there are approximately 1,200 exploration companies based in British Colombia with the majority located in Vancouver. Exploration expenditures rose meteorically (113% year-on-year) to $431 million in 2011 with the majority focused on development projects and $77 million on early stage projects.
As they tend not to generate any revenue, exploration-
focused firms are highly dependent on access to financing, traditionally from the Canadian equity markets.
According to our research, equity financing transactions, specific to the precious metals sector, over the past few years appear to have peaked in the latter part of 2010.
The recent mining finance trend has seen less equity financing both in number and absolute value which translates to elevated financing risk for exploration firms leading to potential solvency issues.
I note that from Q1/12 to Q2/12, the number of equity financings fell 33% while the gross value of the transactions declined by 60%.
Note that the number of equity financing transactions valued at over $10 million fell 66% and the value of this size of the transaction subset fell by 70% over the same period.
Upon reviewing over 400 micro-cap precious metal mining equity plays with market capitalization values of $25 million or less that are listed on the TSX and the venture exchange, I found that the average cash position of this group was approximately $1.5 million and that 75% of those reviewed had cash positions of less than $1.75 million.
The consequences of the heightened financing risk has translated to M&A opportunities and a search for alternative financing sources such as vending royalties (pre-production), strategic investments, asset sales and non-bank debt financings. Recent M&A activity suggest an appetite by regional players to opportunistically acquire undervalued assets in risky geopolitical jurisdictions.
An example is the Inter-Citic Minerals (ICI-T) acquisition (August 27, 2012) for $250 million ($2.05/share) by Western Mining Group Co. Ltd., a resource company based in China, which represented a 40% premium to its price prior to the announcement.
After initiating an auction process (March 14, 2012) at the request of a major shareholder, La Mancha Resources (LMA-T) was acquired (August 28, 2012) by Weather Investments II, a firm managed by an Egyptian industrial magnate for $3.50/share, which represented a 55% premium to its previous close. La Mancha Resources has gold operations in Sudan, Côte d'Ivoire and Australia.
Alternative financing sources for exploration are limited but include private placements or joint ventures with cash flowing producers or cashed-up explorers.
IAMGold (IAG-T) spent $13 million (October 2011) on minority stakes in two Colombian gold-copper explorers, Bellhaven Copper&Gold (BHV-V) and Colombia Crest Gold (CLB-V), active in the Mid-Cauca Belt of Colombia. Calibre Mining (CSB-V), which is focused on gold-copper projects in Nicaragua, has joint ventures with Alder Resources (ALR-V) and B2Gold Corp. (BTO-T), the latter being the largest gold producer in Nicaragua.
On May 3, 2012, Calibre Mining closed a $5 million strategic financing as B2Gold acquired a 10% stake in Calibre Mining.
Some explorers have sought alternative financing solutions such as debt, for example, Kimber Resources (KBR-V) entered (July 18, 2012) into a $5 million, one-year bridge loan facility with Sprott Resource Lending Partnership to advance their Monterde project in Mexico.
A rise in risk appetite has been evident of late as I have observed that some early-stage companies such as Goldquest Mining (GQC-V), Gold Standard Ventures (GSV-V) and Canamex Resources Corp. (CSQ-V), whose drilling programs delivered highly anomalous gold intersections, were rewarded with higher bids on increasing trading volumes.
Some obtained equity financing on the back of the potential reflected in the drilling results.
I believe that a return to higher volumes (fall 2012) in a positive, well-supported commodity price environment will moderate the financing risk for some mining equity plays in the near to medium term, specifically those levered to precious metals.
Note there remain other salient external risks – geopolitical and permitting – to overcome. Management will continue to play a critical role in mitigating the internal technical and execution risks but they will also need to be innovative with respect to tapping avenues of alternative financing while managing permitting risk. •
