Having been fortunate enough to attend a number of industry forums in recent days and to have the opportunity to listen to a large number of presentations given by explorers, mining companies, fund managers, brokers, commodity analysts and government representatives, your scribe takes the view that three things are top-of-mind at present across the mineral resources sector.
Number one has been the recent pullback in the price of bulk commodities and the uncertainty this has created, which has spread far beyond the actual price movements themselves. For example, discretionary spending has been deferred even by those companies without any direct exposure to prices for the likes of coal and iron ore.
Number two are the ongoing development in mineral policy and taxation of the resources sector both at home and abroad, with a continuing trend towards increasingly higher effective tax rates for new mining developments.
Number three is the worry, and in some cases distress, that sources of risk capital for mineral exploration are drying up fast.
The balance of this column is directed towards point three; the difficulty in raising new equity by those explorers who are tight on cash. This is a challenge commonly faced by explorers, of course, but the currently depressed equity market situation does, however, set the “degree of difficulty” to raise new funds at a very high level.
Some junior companies are pretty well set, having raised new capital in better times in 2011, leaving a significant cash buffer on which to continue to operate. Other companies are in trouble, with cash running low, and with one eye already on the end of calendar year “shut down” of equity capital markets that is fast approaching.
It is here that your scribe has witnessed some behaviour of late that does not put our industry in a good light. On occasions I have noticed that those companies “with the cash” are seeking to exploit their strong position to a point that borders upon unethical behaviour, making opportunistic “fire sale” offers to their weaker counterparts with accompanying rhetoric along the lines of “where else are they going to go?”
Individuals who behave in such a manner forget that the mining sector is a small industry (at least people-wise, that is) and that situations can reverse very quickly (certainly far quicker than memories erase). Having been through the wringer a number of times over the years, your scribe keeps two quotes in mind that help put things into context when it comes to facing difficult situations and decisions - with the current market for raising new equity certainly qualifying as such a difficult situation.
The first quote is borne from firsthand experience, although it’s somewhat negative. It goes along the lines that “when times get really tough you will find out who your friends are – and you haven’t got any!” Business is simply business.
The second quote is far more inspirational and positive, and I sincerely hope it’s more help than the first as a call to arms and source of renewed energy to those in need of support. It is not taken from Kipling, Churchill or any other of the quotable greats of history. It is actually from an anonymous lower league football coach to his team. It goes like this:
“Anybody can be a leader, can be excited, can be first-in-line when things are going great: The test is when you battle through tough times, when things aren’t perfect – where do you stand? On that day – and for the rest of your life – you look in the mirror and you know – you know – I gave it all I had, and I gave it for a worthy cause.” anonymous coach
Those explorers at the “sharp end” of the cash flow statement may find inspiration in the above quote.
It is the sort of thing that makes me want to find my old football boots! There are certainly some tough times ahead – and some very tough calls to be made at the junior end of the exploration sector.
That said, I would also encourage those who are fortunate enough to be spared from the difficult decisions being faced by cash-poor companies to first seek to empathise - rather than first seek to exploit.
Good Hunting
Allan Trench is a professor at Curtin Graduate School of Business and research professor (value and risk) at the Centre for Exploration Targeting, University of Western Australia, a non-executive director of several resource sector companies - and the Perth representative for CRU Strategies, a division of independent metals and mining advisory CRU group (allan.trench@crugroup.com).
