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Mangled financing market puts shine on strategic exploration alliances

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investor15   Monday, 06/17/13 10:47:15 AM
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Mangled financing market puts shine on strategic exploration alliances

There's more to a strategic alliance than mere shared costs.

Author: Kip Keen
Posted: Wednesday , 17 Apr 2013

There's one good reason for explorers not to want to touch strategic alliances with a major. You have to share. You have to share potential projects that you generate and you may even have to share projects you have already generated, as in a regular earn-in agreement. This has been one of the traditional reasons to forego such deals for mineral explorers - it lessens the gain in a potential discovery.

But there's also one good reason to flock to strategic alliances. They distribute - even negate - exploration costs, and this for a typically non-cash-generating mineral exploration company can be crucial point - especially now.

Indeed, I think this is a fascinating time to watch for strategic alliances as much as for their potential to generate new discoveries - the key outcome for speculators - as what they say about management at this moment in the mineral exploration sector suffering a protracted lull in readily-available financing. And there is no doubt of this state of affairs - depressing data in a moment.

Maybe we haven't reached the nadir of this financing famine. Maybe that's still to come. Maybe we will never wholly recover. Who knows. But, regardless, it's safe to say this market is totally and completely mangled and unrecognizable. Money is not flowing into the hands of mineral explorers for a variety of reasons. Among them, investor have spurned the sector due to lack of major discoveries in the past few years. But the cause is not the subject here. The effect is and the latest data on financings beat the point to a bloody truth.

The chart below compares mining sector financings in January and February on the TSX and TSXV - typically decent months for getting funding - for the past three years based on data from Oreninc and quoted by Reuters. It's an uncomplicated picture. It says financings have atrophied. And the reality is probably worse for mineral explorers proper as the data below also encompasses miners and developers - yet if one sector has been ignored the most it is the mineral explorers.

Now coming back to the main thread: mangled financings and those companies striking strategic alliances, with a couple points to make. First: mineral explorers are now far more willing than in recent years to strike them. The easy money is gone, removing an extreme incentive to undergo a reasonable measure of dilution via equity to fund a project all by yourself. Now partnerships, if they can be found, are in.

Over the past couple days I spoke with the heads of three mineral exploration companies that struck strategic alliances in recent weeks. They weighed in on the subject and they all agreed there was no doubt that strategic alliances, and other like partnerships, have become far more attractive as an option to underpin an exploration program during this ever worsening drought in financings. This may come as a “duh” like insight, but it's worth remembering this is a recent reversal.

First I spoke with Erdene Resource Development President and CEO Peter Akerley. He was frank about how the changing financing market played into its decision to sign with a larger partner, in its case Teck, to help fund exploration on a portion of its properties in Mongolia and also to generate new projects. “I don't think there is any question,” he said of being nudged to partner up in Mongolia given a lack of decent financing options. He noted that up until recently equity was easy to come by and for the likes of Erdene, during better days for financing, a partnership was not the preferred route to fund exploration. As Akerley put it, “Why would you give up an interest if you could go to the market and easily raise cash with low dilution?”

Next I turned to Jean-Mark Staude, president and CEO of Riverside Resources, which recently brought Hochschild Mining on board a strategic alliance, the aim of which is to come up with new projects in Sonora state, Mexico. Staude noted that whereas during the fat days of financing strategic alliances were less popular to potential shareholders, perhaps even eschewed by them as unattractive in comparison to wholly-owned projects, in the past year or so they were starting to view them as an advantage.

Finally, I asked Tom Schroeter, president and CEO of Fjordland Exploration which recently struck a BC-focused partnership with a Canadian-based subsidiary of Sumitomo - Sumac - about his view on strategic alliances. He rendered doing such deals down to necessity, something for all juniors to at least consider with cash having dried up. “Many juniors are in survival mode,” Schroeter said. “If you can't see ahead a few months, you're in trouble. It behooves juniors to do whatever they can to keep their companies going.” Schroeter, who has been exploring BC for minerals for over four decades, also gave a dire assessment of the current state of the financing markets for juniors. “I've never seen anything like it,” he said.

To the second and final point: It's a valuable moment to be watching mineral explorers for what they can do during one of the worst junior markets in living memory. Strategic alliances - and who can do them - are revealing in this respect. Whether they're struck because a financing isn't possible or attractive or they're the business model anyway, those that consummate them at this time are putting the richness of their contact base to work and displaying the depth of their expertise in a particular region or deposit model. They show they can sell or promote something to the toughest, most circumspect buyers in the market - majors that might otherwise just build an in-country/region team and property portfolio themselves if they thought it any easier.

Quick inspection of Akerley, Staude and Schroeter and the companies they head reveals commonalities to help explain why majors have, in their cases, have chosen to team up. All are geologists. All have operated in their respective region of focus - Mongolia, Mexico, and BC - for over a decade, if not quite a bit more. All have a history of working with majors in the past. All have their own, fairly extensive project portfolio in said countries, including projects that haven't been farmed out.

In this, being able to sell more than properties but also expertise, there is clearly safety during these dog days of financing. If risk investors have crawled into holes to hide, not so majors who need new discoveries. Some of the juniors that opt - and succeed - in doing strategic alliances (and not all need or want to, it's worth emphasizing) are showing they can do exploration during some of the harshest financing conditions in recent decades. They stave off a fate many will not. Schroeter declared simply, “Otherwise you'll run of money and go belly up.”

Guts of three recent strategic alliances

Riverside Resources (operator): Hochschild to spend C$750,000 a year, or C$2.25 million over three years on new Sonora, Mexico, projects. Hochschild gets 65 percent interest after C$5 million work program per property. On earn-in, C$3 million lump sum payment, then joint venture. To note, the strategic alliance does not include any existing projects, so this is very much new ground being broken at Hochschild's expense.

Fjordland (operator): Sumac to get 51 percent of Dillard property in BC after $3.5 million over three years on exploration. It will also consider new projects within a 20 km radius, on ground mostly staked by others. Fjordland lead on potential expansion of Dillard to nearby targets. Dillard includes past drilling from 1990s, with as much as 187 metres @ 0.24 percent copper. Schroeter noted Sumac has been active in BC since late 1950s, but has not done a lot of deals with juniors. Best known for work on Kutcho project (now Capstone's) and also the Bethlehem copper mine.

Erdene (operator): $1 million private placement, most to be spent on its Khuvyn Khar copper project in Mongolia. Teck gets can earn 75% interest on project, and Trans Altai area project, if it spends up to C$10 million on its Khuvyn Khar copper project and C$5 million on other projects. Up to C$3 million in financing being considered, or up to 19.9 percent of the company, but this is subject to Teck getting clarity on Mongolian government's position on exploration and mining sector. Akerley noted it was election year and expected rhetoric over royalties etc. to die down after the election this summer. Further, he suggested staking system, closed since to 2008, may open up again. The strategic alliance, in this regard, may reflect Teck's desire to get in on the ground with a knowledgeable team.


Schroeter - well acquainted with porphyry targets in BC as BC government district geologist early in career and in recent years as the head of Fjordland. Back in the 2007 Fjordland discovered and subsequently spun out its Woodjam copper project, in the Quesnel Trough, into Consolidated Woodjam Copper, part of which is now under a joint venture with Gold Fields, which can earn up to 70 percent of the core project. Over the years there have been some telling intercepts from Woodjam with as much as 359 metres @ 0.69 percent copper and 0.27 g/t gold.

Akerley - longtime president and CEO of Erdene, which is best known for its Mongolian projects and what was until recently its 25-percent stake in the Donkin coal project (75-percent Xstrata) in NS, Canada. Erdene accomplishments include a resource at Zuun Mod moly-copper deposit, as well as advancing its Khuvyn Khar copper porphyry project with early stage drilling. Most recently it discovered interesting - some very high - grades of gold at its Altan Nar project, an epithermal system. Erdene also spun out Donkin into Morien Resources, which is looking at options to consolidate ownership of Donkin. Erdene has been in Mongolia since early 2000s.

Staude - head of Riverside Resources for about a decade now. Focus has been in Mexico, where since the mid-2000s Riverside has driven a variety of projects on its own and under joint venture, both early and more advanced stage deposits. It has worked, and continues to work, with several majors such as Cliffs and Antofagasta to generate new projects. Hochschild is the latest miner to engage it.

Other, proven, partnership-loving juniors: Mirasol Resources (mostly south America), Altius Minerals (mostly Newfoundland & Labrador), Calibre Mining (mostly Central America), Lara Resources (mostly South America). Not on this far from comprehensive list but think you should be? Contact reporter kip[at]mineweb.com.


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