TORONTO (miningweekly.com) – The metals and mining market is in recovery but still weighed down by previous mistakes and latent toxicity that has yet to be cleaned up, merchant bank Oreninc MD Benjamin Cox told members of the Canadian Institute of Mining’s Management and Economics Society on April 30.

Besides, the advantages accrued so far have mainly only been felt by the seniors. “The cash that should have gone to the junior mining space went to the majors,” Cox said. “This is not nearly as healthy a recovery as you might have seen [previously].”

Difficulties are then compounded by failing companies continuing to clutter the junior investment space. “The dead and dying companies were not put out of business, the ones that should have been put out of business. That’s a problem because they’re going to come back like zombies and suck capital away from companies that are decent,” he warned.

REMAKE, REMODEL

Given the recovery’s current limitations, companies must still strive to be lean and willing to overhaul their strategies.

“The market has changed: start looking at new term sheets, new structures and new models,” Cox said. “Update, modify and play with your legal [framework]. Think about what makes sense and what doesn’t.”

“But I’m not saying you should start doing something fancy and I’m not saying you should do toxic things. Still, think about what you’re doing,” he added.

Corporate covenants also need close attention. “We’re sick of seeing companies die because of covenants that never should have been agreed to in the first place,” he said.

Companies in hiatus, with exploration on hold, should consider making investor relations (IR) cuts. “If you’re not doing any exploration, you don’t need a VP of IR. If you’re not paying for a geologist, then don’t have an IR person,” Cox said.

Asset restructuring should be a priority, while deals also need reassessment. "If a deal didn’t work during the peak, then it’s not going to work during a trough. And it might not work into the next peak,” he explained.

If necessary and viable, companies should clear up their share registries, offering investors willing to exit a buyback price they can accept. “Get your registry cleared up before you try to run the stock again,” he said.

Overspending on areas such as office space should be stringently retrenched. “Just because you have good office space doesn’t mean you can find good rocks. I’m sick of visiting junior mining companies with boardrooms that cost more to rent per month than my staff costs me to maintain,” Cox said.

“I want to see a boardroom that’s ugly. I want to see mismatched coffee mugs, I want to see chairs from IKEA and I want to see cleaning staff no more than once a week because I don’t care if the office is clean, I care if the geologists are smart,” he said. “So refocus your priorities: have cheaper rent and get better geologists.”

BACK TO BUSINESS

Juniors re-entering the fray should remember that the process can be difficult. “You’ll have lots of people saying they won’t deal with you. You’ve just got to say: ‘okay, thank you’ and then move on.”

As part of the reappraisal, companies should have recognised their strengths, with their recovery strategy based on these first and foremost. Similarly, they should also recognise their weaknesses and when to divest or move on to the next development phase.  

“You’re [either] in the business of exploration; the business of studies; or the business of turning on mines. These are three separate businesses,” Cox said. “Figure out when you’re handing it [the project] on to the next management team, to a major, or someone else.”

Attention should also be paid to share movements, knowing when they are inclined to rise or fall. “Think about at what stage the capital markets help you and at what stage they don’t, and think about how you are going to deal with that,” he said.

Those looking for opportunities, such as mergers and acquisitions, should seek outcomes that leave all parties contented. “Don’t think you can squeeze someone or put them out of business without it being remembered,” he warned.

Other opportunities are presented with the reduced cost of goods and equipment, although Cox stressed that only those companies possessing the necessary expertise should venture into this territory.

“If you don’t know how to do this, then don’t do it. Otherwise, [for example], start looking to buy a camp, which are going for $50 000 where previously they were going for $500 000,” he said. “There are also occasions where, if you’re willing to go to the camp and take it down, you’ll get it for free.”

FILTERED THROUGH

Cox then considered the investors’ position. “Don’t fall in love with one sector because the odds are you’ll pick wrong. And if you pick right, then you’re probably not smart; you’re just lucky.”

“Have a filter [for investing]. Can you imagine the company operating a mine? Think about the project,” he said, emphasising the importance of careful research and consideration of a project’s resource potential. 

“Ask yourself if this is ore or not? Will this actually be economic? … Think, look and read,” he said. “And don’t read a presentation assuming it addresses everything. Go through it with a checklist, ticking things off.”

“[Ask whether your] questions have been answered. If not, then call management,” he added. “And if management can’t answer simple questions, then you might have a problem. Why give them your money when they can’t tell you what should be answerable?”

“Finally, just because something is cheap doesn’t mean it is worth buying,” he said. “And don’t drink too much Kool-Aid; it’s easier to get out of 1% of ten companies than 10% of one company. And at some point you’ll want to get out, so make sure you can.”