Barry FitzGerald: Junior goldies with cash to make it through the bad times – and hits pending
A record 2,620 mining-types are descending on the mining industry’s spiritual home of Kalgoorlie for the annual Diggers & Dealers bash which kicks off on Monday.
Due to the impossible task of absorbing what is said by the 70 companies making presentations over the three-day conference, delegates will be sorely tempted to break things up by indulging in some bonhomie at the local watering holes.
There could well be some embarrassment though over who has got the next round, or who is funding the next behind-the-bar, on top-of-the-bar, entertainment.
That’s because the record roll up to the conference masks the harsh reality that the junior explorers are facing a cash squeeze brought on by the slump in commodity prices (other than lithium), and the broader market malaise.
Juniors don’t have cash flows to fund their activities, making them reliant on having easy access to equity funds from the market to keep the doors open.
Should the cash dry up they don’t go bust. They either embark on massively dilutive equity raisings, or they sink into hibernation.
Either way, it is a value destroying exercise for investors. So now is the time for investors to be alert to the cash position of the explorers. It doesn’t require any forensic work as quarterly cash reports from the juniors are required by the ASX.
The June quarterly cash reports are all but in and as suspected, there is a whole bunch of juniors with less than 12 months of cash to cover listing fees, legal fees and administration/staff costs, let alone fund an exploration program.
Richard Schodde from Melbourne-based industry consultant MinEx is an advisor to companies and governments on mineral exploration trends.
He told Garimpeiro that the average junior company only ever has 12 months of cash coverage at best.
“So they are always running with a half empty petrol tank. When they get down to 6 or 3 months coverage they look to raise equity funds. But now is not the time to do it because shareholders will get diluted to buggery.’’
Schodde said ominously, funding for the juniors started to dry up in the trend setting Canadian market about six months ago.
“With commodity prices falling, the sentiment in the Australian market is looking pretty ugly for juniors to be able to raise money unless they drop their pants, and they don’t want to be doing that, so they will go in to cash conservation mode which means less holes being drilled and less discoveries.’’
Schodde was not completely bearish though, suggesting that because of the smashed share prices of the gold juniors for example, it is possible to pick up those with drilled-out resources for the equivalent of $10-$20/oz, remembering it costs five times that to find the ounces in the first place.
“So it could be turning in to a buyer’s market in terms of buying juniors with known deposits. The question then is to make sure you’re buying something that is good enough for it to be developed,’’ Schodde said.
That’s cheering stuff. Garimpeiro adds another layer of protection – focus on well-funded juniors with potential high impact exploration either underway, or just around the corner.
If they hit the good stuff, the equity markets will fund them for the big push regardless of the overnight moves in markets and commodity prices. And if they don’t, they won’t be hitting up shareholders for funds in a dilutionary raising, not anytime soon anyway.
Talisman (ASX:TLM): Trading at 14.5c for a market cap of $27.2m. It is 18% owned by rich lister Kerry Harmanis who has just topped up his 18% stake in an off-market trade at 16c a share.
His top up follows news that weather permitting, the company’s potential high-impact copper and gold hunt in NSW is ready to go after the identification of a dozen high-priority magnetic and gravity targets.
Cash at March 31 was $8.2m and the company holds a royalty on an iron ore mine in WA which pulled in $6.4m in the last year. So it makes for a self-funding explorer ready for a shot at finding the next big deposit in the Cobar Superbasin.
Falcon Metals (ASX:FAL): Trading at 22.5c for a market cap of $40. Only joined the ASX in December last year when it raised $30m at 50c a share. So newcomers would be paying less than half what subscribers to the IPO coughed up.
It is looking for a “new’’ Fosterville, Bendigo, Ballarat or Walhalla on a big ground position to the north of Bendigo in Victoria where the rocks are hidden beneath Murray Basin sediments. It recently reported nice results from one of the prospects at its Pyramid Hill project area.
Just as important is that it can follow through with a major drilling later this year thanks to a cash kitty of $26.4m at March 31.