The Conversation (0)
Junior mining companies have struggled to raise money to finance their projects in the past year, and copper miners are no exception. But as China and India’s industrialization accelerates, demand for copper will continue to exceed supply, making copper miners that can start production in the near term especially attractive to investors.
If a recent PricewaterhouseCoopers (PwC) report is to be believed, this year junior mining companies have had great difficulty raising funds to finance the exploration and development of their projects. The top 100 mining companies on the TSX Venture Exchange saw a 52-percent decrease in debt and equity financing compared to a year ago.
“[I]nvestors are skittish; wary of the volatile market,” John Gravelle, mining leader for the Americas at PWC, said in the report. “They aren’t looking to add more risk to their portfolios; instead they are risk adverse and shying away from investment with a high risk-reward ratio. Unfortunately for juniors, this is their ‘sweet spot.’”
Harry Anagnostaras-Adams, CEO of EMED Mining (LSE:EMED,TSX:EMD), which plans to restart the Rio Tinto (LSE:RIO,ASX:RIO,NYSE:RIO) open-pit copper mine near Seville, Spain in the next year, said by telephone from Madrid that “equity raising on the major mining exchanges in Canada and Australia has been few and far between in the last 12 months.” That is a reflection of poor share price performance, with an estimated median return of “50 percent negative.” However, in his opinion, that is because many of the companies were overpriced before.
On the other hand, EMED’s share price has risen 38 percent in the last year, which reflects the progress of the company’s projects, Anagnostaras-Adams said. Earlier this month, EMED secured a $50-million funding package with RK Mine Finance of the Red Kite Group; it will be repaid in shares and copper once the mine is in production.
Red Kite pops up repeatedly as Mr. Moneybags for junior copper miners. This month, Orsu Metals (TSX:OSU,LSE:OSU) signed a $25-million funding package with RK Mine Finance to help finance the construction of its Karchiga project in Kazakhstan. Also this month, Oracle Mining (TSX:OMN,OTCQX:OMCCF) completed a $10-million placement of shares with the MF2 Investment Company, an RK Mine Finance affiliate, to help finance the Oracle Ridge copper mine in Arizona. Both Orsu and Oracle are in the later stages of developing their projects and that may be the key to where the money is flowing.
“The depletion of reserves is a truism and the need for new large start-ups is a truism, otherwise the world can’t continue to industrialize,” Anagnostaras-Adams said. “The only question remaining is how many new mines and what cost base of a new mine can be supported. Our mine is reasonably well placed because it’s a restart and because of so much inherited infrastructure. But if it had been on the top of a mountain and you had to build roads and power lines and ports, it probably wouldn’t have been a proposition [for investors].”
Considering BHP Billiton’s (ASX:BHP,NYSE:BHP,LSE:BLT) decision to put the $20-billion Olympic Dam project in South Australia on hold — because it had too long a lead time to warrant investment at current metal prices — other projects that are in early-stage exploration will fall farther behind in the line to raise funding, Anagnostaras-Adams said.
Some will be forced to consider alternative strategic options as a result of poor share price development and difficulties raising cash. For others it may already be too late.
Lumina Copper (TSXV:LCC) said in June that it was reviewing strategic options that could entail the sale of all or a portion of its assets; an outright sale of the company; or a merger or other business combination involving a third party. That came after saying in May that it was unaware of any specific reasons for a sharp drop in its share price. Lumina Copper’s shares have lost 32 percent so far this year. The company said in October that it “has had and continues to have transaction discussions with a number of major mining companies,” and issued shares to an unknown investor to fund capital needs through 2013.
Hana Mining (TSXV:HMG), which last raised funds in February by placing 10 percent of its shares with Cupric Canyon Capital, Barclays Capital’s natural resource investments division, for C$1.35 per share, cancelled stock options the following month, and then announced in October that Cupric Canyon would acquire it for C$0.82 per share, 81 percent above the company’s market capitalization at the time, but 40 percent below Cupric Canyon’s initial per-share investment in February.
Still, PwC’s Gravelle and Anagnostaras-Adams aren’t pessimistic about the industry’s prospects.
“Recent IPO successes, deal activity and improving trading volumes point to a financing turnaround for junior miners in 2013,” Gravelle said. And EMED’s CEO thinks that copper specifically may be one of the sectors that will be better off.
“There is an imbalance in the world and it’s because there’s been an undersupply for at least a generation,” Anagnostaras-Adams said.
Just yesterday, Bloomberg Businessweek reported that Barclays expects copper demand to exceed supply by 316,000 metric tons in the first six months of 2013 as China’s growth accelerates.
“So if an investor wants to be part of the copper industry, the starting point is that it is one of the bright points in the investment world because of that imbalance and because of the structural problem of supply and demand. Notwithstanding the stock market’s performance in the last 18 months, copper is one of the bright sectors for an investor to look at.”
And just this last week, companies such as Ecuador Gold & Copper (TSXV:EGX), NWM Mining (TSXV:NWM), Copper North Mining (TSXV:COL) and Cordoba Minerals (TSXV:CDB) have announced the closing of, or plans for, financing, according to company statements on Canada Newswire.
Anagnostaras-Adams cited the vote of confidence coming from Goldman Sachs (NYSE:GS), the company’s premier financier: the investment bank wants EMED to pay it back in copper so that it can create exchange-traded funds and other financial products based on the red metal.
“They see copper as the new gold, in a sense,” Anagnostaras-Adams said. But investors will be discriminate about where they place their money, and for now it seems they favor miners whose prospects for near-term production are bright.
Securities Disclosure: I, Ragnhild Kjetland, hold no investment interest in any company mentioned in this article.