As sources of cash become scarcer, can silver juniors compete for it?
The state of equity markets plays a key role in shaping trends and strategies in the exploration industry from year to year, World Exploration Trends 2012 says.
Junior mining is a high-risk, capital-intensive business. When equity markets are vibrant, risk-friendly environments, junior miners can raise attractive amounts of cash. That is what happened in the latter part of 2010 and the first half of 2011 when explorers raised some $7.4 billion. But those conditions began to fade in the second half of last year.
“The perception that’s out there in today’s environment for junior developers and explorers is extremely negative,” Wendell Zerb, a mining analyst at Canaccord Genuity, told the Financial Post.
Acquisitions have slowed and financing has dried up, he pointed out.
For junior miners, access to a lifeline is becoming increasingly competitive, which raises questions about how attractive silver juniors are in this market.
As economic uncertainty overhangs the markets, industrial demand for silver has weakened, leaving investors to pick up a lot of slack. But their appetite for the metal has also simmered down as we’ve moved through the year. Furthermore, prices have fallen while supply has risen, and it is expected to continue rising.
Adding to the challenging conditions that silver companies face are the loads of the metal being produced by miners in other sectors. In 2011, mine production accounted for 73 percent of the supply, but primary silver mines only contributed about 29 percent, and strong by-product silver production is a trend that is expected to continue.
When Coeur d’ Alene Mines (NYSE:CDE,TSX:CDE) recently announced intentions to issue $350 million in unsecured notes and enter into a $100 million secured revolving credit facility, Standard & Poor’s assigned a B+ corporate rating to the company and a BB- (one notch higher) issue-level rating to the company’s proposal.
S&P noted that the rating incorporates its view of the “company’s ‘weak’ business risk profile.” This conception is characterized in part by “limited mine diversity” and “the risks of being a primary silver producer,” including the fact that the majority of silver comes as a by-product of other mining activities, which “introduces additional uncertainty.”
Just as there are risks to being a primary silver producer, there are also risks to being a silver junior, especially given the current conditions. In a market where junior mining projects are in no short supply and silver is already abundant, silver juniors could could find increasing amounts of skepticism about their projects. Major miners and equity investors may begin to raise questions about projects or the ability of juniors to use the current conditions in their favor.
“If equity markets do not improve relatively early in 2012, majors and intermediates looking to finance or joint-venture with cash-strapped junior explorers are likely to negotiate far more favorable terms than they would have in 2011,” the World Exploration Trends report says.
Just as larger mining companies have become more savvy with their investment strategies, so too may equity investors. For example, consider how the advent of ETFs altered the market and provided leverage for investors to pressure major producers for better dividend payouts.
Having a strong management team, a good location, and positive drill results may no longer be enough to boost a silver junior mining company to the top of the pool of consideration. A competitive market calls for a competitive strategy, and silver juniors should consider ways to make themselves more attractive without having to be pressured.
Chris Ecclestone, a mining strategist, was recently quoted as saying that some companies, “especially juniors without stable sources of income, [burn] through money at unsustainable rates – mostly owing to top-heavy management structures, without making any significant progress in moving projects up the value curve.”
While traditionally junior miners are identified as companies that spend money instead of making it, a number of silver juniors, such as Alexco Resource (AMEX:AXU,TSX:AXR) and Aurcana (TSXV:AUN, OTCQX:AUNFF), have set themselves apart by generating revenue. Alexco, for instance, operates the Bellekeno silver mine in Canada’s Yukon Territory, while Aurcana produces silver from its Shafter mine at the US-Mexican border.
And, although safety is a priority for many investors right now, return on capital is, for most people, the ultimate motive for investing, especially in junior mining.
It is usually taken for granted that discussions about dividends apply to majors, but there are juniors that set themselves apart from the crowd by rewarding their investors in that way. Those companies in the silver space that have revenue streams or are looking forward to them may want to consider this possibility and put themselves in the place of the increasingly cautious investor. In a low-interest-rate environment, silver juniors that manage to pay dividends certainly sweeten the deal.
Securities Disclosure: I, Michelle Smith, do not hold equity interest in any company mentioned in this article.