Junior miners continue to play an increasingly important role in the growth of mining assets through exploration on the African continent and, as emerging producers, constitute an important component of the minerals production chain.

However, they face mounting challenges regarding their survival, let alone profitability, in the current economic climate. Industry experts are, therefore, advising junior miners to consolidate through mergers and acquisitions to survive.

“It seems that the junior mining industry is in the midst of a major correction, largely brought about by a contraction in the previous, and perhaps overheated, Chinese economy that was urbanising at an unsustainable pace,” says mining consultant agency Mining & Energy Advisors International partner Ted Blom.

He expects that future urbanisation will occur, but at a more pedestrian pace, and that the recent boom in procurement figures will possibly remain a factor of the past, which could potentially have a positive impact on the junior mining sector.

Blom comments that exploration companies need to mature into producers or sell off their prospects to be profitable.

“The current major downswing in the commodities price cycle is a normal phenomenon, and experienced junior miners will have prepared for a possible severe slowdown in available funding during this part of the cycle,” he says, adding that the problem arises with new or nonseasoned exploration venturers who have not prepared well enough for the various cycles.

Depending on the adequacy of future funding availability and licence conditions, he says, small exploration outfits could continue to explore at a slowed pace, provided their available funding can sustain them to the next upward cycle, or they could curtail all operations to conserve cash until the cycle improves.

Financial services group Cadiz Mining & Resources division head Peter Major emphasises that for junior mining companies to remain profitable, they must cut costs.

He notes that the current state of the industry is dire and that most commodity prices on the whole have been falling for five years now.

Cutting Costs

Blom notes, besides the usual challenges, such as infrastructure, politics and corruption, a major hurdle for junior mining operations currently is being able to survive, while maintaining their exploration permits.

Owing to most junior miners running small-scale operations, he says, they should carefully assess their client base and see whether these are still defendable against the majors, which, in turn, will be looking to place product anywhere just to maintain production.

“In instances where the junior does not have a defendable competitive advantage, it would be best to shut up shop and return funds to shareholders,” Blom adds.

To counter shrinking margins, owing to costs and capital overruns, mining companies are exercising greater financial discipline and shedding marginal noncore assets, said Vantage Goldfields executive director Dr Willo Stear at the third yearly Junior Mining and Exploration Conference and Exhibition that was held in Johannesburg, in October last year.

He pointed out that large mining companies were putting much-needed emphasis on cutting costs, improving profitability and limiting risk, along with reducing uncertainty, and highlighted that mineral exploration was a cost-cutting casualty.

Capital Investment and Funding

Investors and bankers aim to have a return on their capital as soon as possible, Blom cites, adding that if they do not stand a chance of having their initial contribution repaid, they will not enter the minerals exploration arena.

“Thereafter, they consider whether the project can meet their hurdle rate and whether the project will increase the future revenue streams of their investment basket. As soon as future revenue is equal to or less than current revenue, investors have to liquidate or face dilution in future valua- tions, based on decreasing future cash flows,” he explains.

Stear commented that the South African government appeared to be losing sight of where capital would come from for change to take place in the country’s mining industry, and noted that South Africa had declined globally, in terms of having a competitive mining industry, from 1989 to 2014.

“Emerging countries are dictating terms and conditions to mining companies, but the general mining environment needs to be attractive for return-seeking financiers, and South Africa is failing in this regard,” he noted.

Major explains that most investors weigh up all the known facts and likely scenarios when considering investment in a company, as well as the environment in which a junior miner is functioning in.

“Investors then give that company their money – because they really honestly believe that that company will give them a return that is a multiple of the likely return they would receive from the market,” he says.

He adds that it is important for African governments to make mining attractive to foreign investors because mining creates jobs, generates and improves skills and training, as well as generates wealth, and that all counties, particularly African countries, desperately need foreign investment.

Blom adds that more than 80% of foreign investments are threatened by a mismatch between investor and regulator expectations, coupled with a lack of a code of governance.

“The list of foreign investor casualties is long and will continue to grow unless attention is paid to the mismatch between investor and regulator expectations. Although many African governments wish to attract foreign investment, they find it difficult to distinguish between investments and hand outs,” he cites.

He stresses that investors expect and demand “quid pro quo” and, too often, African governments, after having attracted investors, attempt to change the landscape by wanting a bigger share of the profits, especially if the project is seen to be successful.

“The temptation for a revolution in the mining landscape is always higher during a perceived ‘resources boom’, when investors are accused of pillaging the mineral ores of the people. Very few government officials understand, or want to understand, the concept of risk versus return, therefore, the poor populations inevitably become the losers because investors simply take their money elsewhere,” he says.

The sooner a code of best practice or governance is formulated for the resources sector, he adds, the sooner the junior mining industry can expect a more stable investment climate for mining projects.

“Now that the boom has receded, many governments have been caught with their pants down and face massive job losses, premature closures and disinvestment owing to their earlier greedi- ness,” he says.

Blom notes that Presidents and Prime Ministers should prioritise creating a favourable foreign investment climate, failing which, their countries will remain underperformers on the commodity roller coaster.

The Way Forward
Major notes that the biggest potential for growth within the junior mining sector in South Africa lies in the 6 152 nationalised abandoned mines currently owned by government.

“These mines are waiting for a genuine, properly capitalised mining company to take them over and run them again,” he states.

Blom notes that new commodities – such as rare earths and industrial commodities, which typically are not amenable to large-scale mining – will be labour intensive, yet profitable, owing to their scarcity in the future.