CMKM Diamonds Inc. (fka CMKX)

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This year’s PDAC is seeing plenty of visitors, but a dearth of capital which will lead to serious shortages ahead, and ultimately far higher metal and stock prices.

Author: Lawrence Williams
Posted: Wednesday , 06 Mar 2013
TORONTO (MINEWEB) -

I’ve been attending PDAC meetings since the late 1970s and have seen it through a number of major downturns and subsequent recoveries, but I don’t think I’ve ever seen such a downbeat convention as it is proving to be this year.

What sets it apart is an underlying feeling that this time the downturn may have longer to run.

Even in 2009, following what may have been an even bigger market crash in Q4 2008, there were already signs that the industry might be pulling out of its fall; this time around that optimism is not at all apparent – and this is within a community which is by its very nature a generally optimistic one. If you’re a prospector or a geologist or a miner you have to be an optimist by definition.

It is interesting viewing the local press in this respect. There were indeed comments leading up to the opening of the event that the situation among the TSX-V juniors in particular was so dire that there were almost certainly going to be a big number of no-shows with the companies not going to be able to afford to send personnel, and put them up at the kind of inflated Toronto hotel prices currently prevailing because of the general influx of visitors for one of the bigger events in the Toronto convention calendar.

True there were indeed some no-shows, but they were actually very few and far between – and maybe personnel were having to sleep on the streets in sub zero temperatures, but the show must go on and they were dutifully at their booths when the show opened each day. OK that is an exaggeration!

And yes the visitors did come too. Perhaps not quite in the numbers seen a year ago when some 30,000 attendees were present, but judging by the crowds thronging the show – perhaps mostly looking for jobs – it won’t prove to be far short of last year’s record number, and could possibly yet exceed it – but it somehow doesn’t feel quite as crowded as last year.

So the visitors did indeed come, but what seems to be lacking is the money needed to finance exploration and mine building. Few juniors can raise any capital at all, except perhaps in minuscule amounts, and at a high cost, which may enable them to stay solvent for another couple of months until the long awaited upturn happens….. if it does.

When it does come, which it surely will at some time, it may well be too late for a number of junior explorers, and perhaps for some operators working too close to the margins given that precious and base metals prices are currently at lower levels than they have been for some time. The global economy still seems to be far away from any kind of serious and sustainable recovery sufficient to drive at least the industrial sector higher, while precious metals should be a different story but the short sales merchants seem to be intent on keeping prices down for whatever reason and for the time being, at least, they seem to be winning this battle.

So, how does a junior raise money in this environment?

In general stock prices are too low to make equity finance an option without absurd levels of dilution, and the banks don’t want to lend anything that could be considered risk capital. Private equity may be available for the better prospects, but at a cost – and those who may provide this could well be the real beneficiaries of the current situation by making good deals at rock bottom prices. The only other option for the junior faced with imminent extinction is, perhaps, to sell off key prospects, but in this kind of market it is only probably the best of these which may be marketable in any form and this is very much selling off the family silver and may just be unacceptable. Those with really good prospects, but no money, will undoubtedly be taken out at bargain prices by bigger companies who have capital, or even by other juniors who have money in their treasuries – while undoubtedly there remain many who will not be around in any form by this time next year.

Canada’s Financial Mail, accessing a website run by respected analyst John Kaiser, noted that there were no less than 94 junior explorers with negative working capital due to exhibit at the PDAC. As noted above, all but a handful did actually make it there, but they are unlikely to have found the panacea for their problems. The newspaper went on to quote Kaiser as saying that there are now more than 700 companies listed on the TSX Venture Exchange with less than $200,000 in the bank – and it is generally reckoned that it costs a company around this much annually just to keep it afloat with fees, rents and minimal personnel expenses. The juniors are indeed in cash preservation mode and it is notable that cash preservation is also the mantra of many others who do have money in the bank, but are worried that low market prices, and the dearth of available funding, may continue to be the situation for months, or even years, ahead.

Of course the other indicator, already beginning to accelerate, is a growth in mergers and acquisitions as good companies are being snapped up at bargain price levels. While only a short year or so ago a company could expect to have to pay a premium of at least 30% or more over the prevailing stock price to cement an acquisition, nowadays perhaps a 9 or 10 % sweetener is at least sufficient – and at much lower stock prices. If this horrendous market situation for the juniors persists for much longer then it is probable that acquisitions at par – or even perhaps a discount – may well be seen.

Even the big guys are suffering. One doubts if the industry has ever seen such a huge level of write downs being taken on what, in retrospect, have been ill-advised purchases and investments.

Capital spending is being so closely reviewed that a good number of very significant projects are being put on the back burner, or cancelled altogether.

Mining has always been a cyclical industry – and this shows just why that is the case. In times like these (and this is perhaps the worst such time in living memory), new mine exploration and development becomes hugely curtailed. When everything eventually recovers then there comes about an unsustainable shortfall in available supply to meet global industrial growth, and metal prices, and mining stocks perhaps even more so, skyrocket again.

The really shrewd long term investor will indeed be buying stock now for the long haul until the next major upturn. This is how fortunes are made in the mining sector.

What you need to be sure of, though, is that the companies you invest in are strong enough to ride out whatever time remains before the next big upturn happens. We commented recently that this may well be the time to start looking at investing in the major mining companies again (Is now the time to reinvest in mining majors?) . Their recent performance has been flat to negative, but there is little doubt they can comfortably ride out the rest of this recession – and then... boom!

As the industrial world, fuelled by ever rising global population growth, needs more and more metals and minerals, and they prove to be in desperately short supply because of the current shortfall in exploration and capital spending, prices will go through the roof.

Every cloud has a silver lining – eventually!

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