Investor interest is slowly returning to the junior mining sector, with juniors turning cautiously optimistic, new data from advisory firm Grant Thornton has revealed.
“Capital is slowly returning to the sector, but it is filtering in selectively. Competition for investors’ attention will be intense, with 74% expecting the need to raise capital in 2015,” said Grant Thornton energy and resources partner Holly Stiles.
“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,” she added.
Grant Thornton pointed out that 79% of junior miners that undertook a fundraising in 2014 experienced at least moderate challenges, so indications that the sector could be emerging from the bottom of the cycle were welcome.
In its latest survey of junior mining and exploration companies, Grant Thornton pointed out that some 52% of respondents were considering a joint venture, while a further 42% were considering a project acquisition, and a further 16% were considering a takeover or corporate acquisition.
Around 68% of respondents have an exploration programme planned for 2015, while only 19% were not expecting a major corporate transaction in the next 12 months.
“As valuations continued to fall over recent years, a significant increase in M&A [mergers and acquisitions] 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,” Stiles said.
She noted that the third highest priority for funds from the next capital raising was now acquisitions and 28% of companies had a key corporate strategy of taking advantage of current valuations to secure the acquisition of attractive projects or companies.
However, Stiles pointed out that the road to recovery would be a long one.
Data indicate that 44% of the sector still had a strategy for 2015 focused on minimising costs, which Stiles said was 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 was 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,” Stiles said.
“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.”
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.