Cambridge House International resource conference attendees hoping for a feel-good discussion on the exploration industry's future at the upcoming event, particularly as it relates to Vancouver's floundering junior mining sector, will likely be disappointed.
Prominent analyst and Sprott Global Resource Investments chairman Rick Rule, the moderator of a high-profile exploration panel at the conference, has a simple message: the juniors are dying and many of them should be left to do so.
"People don't want anything in the sector right now, which I think is wonderful. We had a whole bunch of companies created in the 2003 to 2010 timeframe by management teams that were butchers, bakers and candlestick makers," Rule told Business in Vancouver.
"We thank them and excuse those people. The sooner the negative dregs go away, the sooner they're not competing with real companies for capital, the sooner some real value can be created."
Although Vancouver has had its share of exploration success, Rule said many local companies forgot what real value is: advanced exploration efforts that producing companies can acquire and develop.
Too many, however, were simply focused on the story of an asset, fed by an avalanche of press releases about failed deposits with one or two drill holes that had no practical hope of succeeding.
"Canadians need to re-learn what I call 'the direct drive' method of value creation," said Rule.
"That is turning rocks into real money, not turning rocks into paper."
Recent research published by analyst John Kaiser, another scheduled participant on the Cambridge House exploration panel, reinforces Rule's sentiments.
Of the 1,408 TSX-Venture listed companies that Kaiser tracks – the majority of which are resource firms – about 67% are trading below $0.10. Nearly 44% of those companies have negative working capital and collectively owe $925 million.
Based on the last available year-end filings, the cash overhead of the B.C.-based, venture-listed companies that Kaiser follows is almost $1.59 billion.
"There is insufficient fuel in the tanks of all of these companies to overcome the statistical odds of making a major discovery," said Kaiser. "These are zombie companies; they have no future. No one wants to give them real money to pay creditors because there has been no value. The money was spent on exploration plays that didn't turn out. The system has become polluted with amateurs chasing lifestyle."
The struggles of the junior market aren't confined to its bottom feeders. According to a PwC report published last November, the market capitalization of the top 100 mining companies listed on the venture exchange dropped to $6.5 billion in 2013 from $11.7 billion in 2012.
But Rule said that one positive sign in the market has been the emergence of some large private equity investors.
This month, Sprott announced three large deals: one with China's Zijin Mining Group for $100 million and one each with the National Pension Service of Korea and the Korea Electric Power Corp. for $375 million apiece.
Sprott will co-manage the funds in each agreement.
Rule said private equity has an advantage in today's resource investment climate because private equity has the patience to wait and make "real money on real assets, rather than chase the stories."
The January 19 to 20 Cambridge House International Vancouver Resource Investment Conference is scheduled for the Vancouver Convention Centre West.
The January 27 to 30 Association for Mineral Exploration of British Columbia's annual Mineral Exploration Roundup conference is set to be held at the Westin Bayshore.
