Liquidity has dried up as a result of the current economic situation and investment into junior mining com- panies appears to be highly unattractive, said Rand Merchant Bank equity and debt funding of junior mining companies spe- cialist Dr Leigh Bregman.

Speaking at the Terrappin African Mining Congress, in Johannesburg, in July, Bregman explained that even though microeconomic factors had not changed significantly since last year, the macroeconomic environment was “a whole new ball game” compared with the situation in the previous year.

Microeconomic Risks

“The reality is that investors are very sensitive to risk. In good economic times, investors tend to focus on microeconomic risks, such as technical risks and regulatory risks.

“In times of economic uncertainty, investors tend to consider macroeconomic risks. Macroeconomic risks include uncertainty around inflation, interest rates and currency movements.

“The longer the time horizon of an invest- ment, the more sensitive projects are to macroeconomic risks. “Remember, with greenfield projects the investor could, in principle, be more than 15 years away from the first cash flow. “That is a crucial aspect, increasing the risk for invest- ors.”

Bregman said that, at the height of the crisis, “money started leaving even shorter investments, going into overnight deposits and very short term treasury bills.

“The point is that when macroeconomic risk comes into play, investors will usually not get involved in long-term risks such as junior mining. “Long-term money or investment into exploration and junior mining companies is in a very difficult space at the moment.

“I believe that it could be a long dry season before money flows back into high risk and/or long-term risk-taking, which is what exploration finance is.

“Nonetheless, there is still some good news. The producing mining sector is likely to perform very well over the coming years; it’s already visible in share prices.

“Also, new entrants into investment and financing markets may be able to take new strategic, noncommercial views of exploration and development. “There may be investors that want to buy commodities or get into the commodities markets that are not primarily driven by returns, like Chinese companies.”

Tax Break

Bregman said that he was not entirely sure how Trevor Manuel’s July 1 tax break for junior miners would affect investment into junior mining, but was concerned that the amounts given were too small.

“We will have to wait and see, but now is a terrible time to bring in the incentive.

“However, it is a step in the right direc- tion and it is making a concerted effort to facilitate something that the government wishes to see,” he concluded.

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