First glimmers of hope emerge from dire conditions for junior miners
Junior miners with advanced projects are cautiously optimistic, as investor interest slowly returns to the sector after another extremely tough year, according to the 2014 Grant Thornton JUMEX Report.
79% of junior miners that undertook a fundraising in FY14 experienced at least moderate challenges, so indications that the sector may be emerging from the bottom of the cycle will be very welcome. However, the road to recovery is still likely to be a long and bumpy one.
Signs the bottom of the cycle may have passed:
- investor interest returning: 2/3 of the companies surveyed are either experiencing improved investor interest or expect to see an improvement over the next 12 months
- sentiment strengths on commodity prices: 72% of respondents anticipate an increase in its core commodity price over the next 12 months, up from 56% last year
- transaction values improving: 11% of respondents anticipate stronger valuations on capital raisings. Expectations to significantly discount equity prices are diminishing.
“Capital is slowly returning to the sector, but it is filtering in selectively. Competition for investors’ attention will be intense, with 74% anticipating the need to raise capital in FY15.
“Junior miners with advanced projects are best placed and should get themselves prepared to capitalise on the uptick, as investors show signs of increased interest in the sector,” said Holly Stiles, Energy & Resources Partner, Grant Thornton Australia.
Plans for growth:
Popular growth strategies of junior miners include the following:
- 52% are considering a joint venture
- 42% are considering an acquisition of a project and 16% are considering a takeover or corporate acquisition
- 68% have an exploration program planned for FY15
- Only 19% are not anticipating a major corporate transaction in the next 12 months
“As valuations continued to fall over recent years, a significant increase in M&A was widely expected and yet didn’t transpire. However, with many believing that the bottom of the cycle has passed, those companies with cash appear to be more serious about doing a deal.
“The third highest priority for funds from the next capital raising is now acquisitions and 28% of companies have a key corporate strategy of taking advantage of current valuations to secure the acquisition of attractive projects or companies,” said Ms Stiles.
Long road to recovery:
While conditions look to be starting to improve, any recovery is likely to be slow and erratic. A good portion of the sector (44%) still have a strategy for FY15 focused on minimising costs; a worryingly high percentage for shareholders desperate to see value creation after prolonged and deep declines in share prices.
Furthermore, the capital returning to the sector is unlikely to filter down to those that have the most critical need; explorers with early stage projects.
“Companies with greenfield projects will continue to face protracted tight conditions. After several years of limited equity funding, companies with cash balances that have dwindled to levels severely limiting options will need to consider the more difficult decisions around shedding projects or opening themselves to transactions outside the resource sector.
“For companies with more advanced projects and those that have been creative in their approach, building value with minimal expenditure, we’re seeing signs of improvement. It looks as though we’re moving towards market conditions that reward project success through stronger share prices, as opposed to investors pouncing on any success as an opportunity to sell out,” said Ms Stiles.
The report further reveals that limited equity funding, deterioration of company share prices, volatility of commodity prices and regulatory challenges continue to be reported as the key constraints to business.
For more detailed information click here to access a full copy of the report.
*The Grant Thornton Jumex report is in its fifth consecutive year. For the purpose of the survey, Grant Thornton classifies JUMEX companies as mining companies with a market capitalisation of up to $500m and these companies comprised around 37% of all ASX listed companies (755 JUMEX companies of the 2,050 ASX listed companies). We received 100 responses to the JUMEX survey in 2014.
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