TORONTO (miningweekly.com) – Few companies in the Canadian mining sector have had much to celebrate so far this year; the bear market lumbers on, while liquidity remains in the doldrums.

Compounding matters is the uncertainty surrounding metal prices, which has “turned investors risk averse, leading to a challenging market for capital access”, Ernst & Young said in its Canadian Mining Eye for the first quarter of this year.

The country’s junior mining sector is suffering particularly hard. In late May, at the Cambridge House Vancouver Resource Investor Conference, head of Kaiser Research Online (KRO), John Kaiser, noted that 740 companies of the 1 800 junior miners tracked by KRO currently had only $200 000 in reserve.

Unsurprisingly, many companies are now solely focused on keeping afloat, Norton Rose Fulbright partner Robert Mason told Mining Weekly Online in a recent interview. Mason represents issuers and underwriters on corporate finance transactions and mergers and acquisitions (M&A), specialising in the mining and natural resources sectors.

CUTTING CASH BURN
Mason outlined three core survival strategies, starting with expenditure cuts. “All noncore work should cease, while non-integral projects should be put on care and maintenance. Exploration can be cut too; only elements essential to a key project should continue. Anything you might label ‘wouldn’t it be nice’ can be got rid of,” he advised.

Companies should consider their service providers. “For example, some companies will now only consider hiring the cheapest drilling company, regardless of whether they have had a long-term relationship with another, more expensive provider,” he said.

Employee numbers are also worth scrutinising. “Companies should freeze any big hires and think about laying-off non-essential staff,” he said.

Those working with joint venture (JV) partners should also examine the other company’s fiscal health. “Careful consideration of a JV partner’s cash position is essential. If a JV partner suddenly has to withdraw, a company can be left facing 100% of a project’s bill,” he warned.

Partnering to spread the costs could be appropriate for some, although companies that are considered weak may struggle to find an interested party. “Bankers are spending a lot of time trying to pitch various combinations, including possible merger opportunities, but these aren’t really happening. In part, this is because robust companies just aren’t interested,” he said.

“There might be more room to manoeuvre if a cash-rich junior courts a counterpart that holds a good project but lacks liquidity. But again, there’s not a lot of this happening as any company with an excellent project will do all it can to save it from potential dilution,” he said.

FINDING THE FINANCE
If cutting costs is one side of the coin, finding additional funding streams is the other. But the well-trodden path of equity financing is no longer an option for many; the threat of dilution and a poor return is simply too great “The equity market is pretty much closed … there just isn’t appetite for ‘whatever the price’ at the moment,” Mason said.

Other financing options might include overnight marketed deals, whereby a company seeks to build a book with underwriters between the market’s close and its opening.

“We’ve seen a couple of overnight marketed deal attempts [this year]. However, there can be implications. If a company fails to build a book in time, it can be left saying ‘sorry guys’ the next morning and that can have consequences on the share price,” Mason said.

Commodity-linked notes are another method, although they can be complex to establish. And while traditional debt financing still has a major role to play, companies need to show an ability to pay interest on the debt, he added.

“It’s primarily a financing route for companies close to production, in production, expanding or upgrading their mining projects. It’s not really an option for those working on early stage projects. The same applies to streaming deals,” he noted.

Streaming deals are proving increasingly popular, whereby money is secured against future output. “This method has made headway in the past 12 months … we’ve seen Inmet and Colossus, besides others, involved in major streaming agreements.”

However, companies need to keep in mind that by selling at a fixed price, there is the risk of losing upside potential if the metal or resource being sold suddenly breaks higher. This helps to explain why there has not been a rush to secure streaming deals in the sector.

CONTROL THE STORY
Companies need to carefully consider the maintenance and management of shareholder relations as the threat of proxy actions by dissidents or opportunist groups continues to grow, Mason said.

“Any mining company with low share prices can face a proxy threat; in fact, they’re perfect targets for opportunists.

“Companies should always maintain direct contact with their shareholders, as well as monitor their shares closely. [Share ownership could be] changing without the company’s knowledge, so a company always need to work its shareholder list,” he noted.

“The right types of bylaws should also be put in place, which will make life easier in a potential proxy fight. If targeted, a company should seek immediate legal guidance; there’s a lot of behind-the-scenes stuff it will need to prepare for,” he added.

If a company is facing bad news or needs to overhaul earlier guidance, it should voice this to the market now rather than later. “Obviously, there are legal obligations relating to proper guidance. In general, it’s best to be honest if bad news needs to be aired,” Mason said.

“Given the current circumstances, few people will really be surprised if a mining or an exploration company announces that their earlier guidance will now be lower,” he added.

“It’s also important that a company releasing bad news gets it right the first time; you don’t want to be releasing bad news three or four times during the year,” he said. “If a company is uncertain or unsure, it should inform the market that the current announcement is a preliminary one with further updates to come.

“It’s all about the story; make sure your company is in control of it and not somebody else,” Mason advised.