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Pain Deepens for Resource Sector

By James West      Printer Friendly Version
Sep 15 2008 3:37PM

www.midasletter.com

And so it goes. Lehman, (NYSE:LEH) unable to find a buyer, is in Chapter 11, while Merril Lynch (NYSE:MER) has sold itself to the Bank of America (NYSE:BA). More write-downs, more losses, more capital evaporated that was artificially conjured out of thin air anyway. 

Friday’s glimmer of hope in the markets, where the TSX and its side-kick the TSX Venture Exchange actually experienced a modest rise for the first time in ten sessions, was wiped out at the open this morning, as the Venture had by 7:30 a.m. PST had shed 40 points and the TSX was down over 300.

The atmosphere at the Hard Assets Investment Conference in Las Vegas last week was dismal, as the ability to re-capitalize many of the attendant companies grew increasingly unlikely. Especially exploration companies, who had raised funds easily before the onset of financial turmoil last August, and who have for the most part spent the bulk of those funds on drill programs and other exploration.

The massive global de-leveraging that really got up a head of steam this July has now started to take its toll on the one bright spot in the whole mess thus far – the emerging markets. Pundits unanimously proclaimed the Global Growth Story intact, and that certainly appeared to be the case until last week, when record redemptions hit emerging market bond and equity funds across the board.

Last Monday saw $1 billion flee equity and fixed income funds, which is one of the largest daily outflows of capital from that sector since 1995 saw the beginning of record keeping. Over the past three months, $29.5 billion have been withdrawn, and the pace shows no sign of abating.

And the number of derailed emerging markets IPO’s is up dramatically as well.

According to an article in the Financial Times last week:

“The number of emerging market companies to cancel their initial public offerings during 2008 has reached a six-year high point, with conditions forecasted to worsen before the year end.

Sixty deals from emerging markets worth $32.7bn have been abandoned to date this year, compared with 26 deals worth $4.5bn in the same period in 2007, according to data from Thomson Reuters.?

Does this mean the resource exploration business is dead for now?

It certainly appears that some mining companies are going to close the doors. The number of companies under suspension on the TSX Venture has risen to 60, which is the highest number seen on this list since its inception in 2002.

Also indicative of a broad slowdown in the sector is the fact that the average dollar value of financings to TSX Venture listed exploration companies has shrunk so far in September from CA$1.8 million in September of last year to $482,000.

Precious metals producers like Barrick Gold (NYSE:ABX, TSX:ABX), however, have had no problem whatsoever financing themselves, as evidenced by Barrick’s sale of US$1.25 billion in debt securities to a syndicate of investors led by Morgan Stanley and Co. (NYSE:MS) and J.P. Morgan (NYSE:JPM).

The atmosphere for consolidation among juniors might seem a likely solution to the tightness in capital markets for those with good projects but little remaining capital. There are many junior companies whose market caps have decreased to the point where the value of their N.I. 43-101 compliant deposits are more valuable on a per share basis by a factor of ten or more.

Unfortunately, the appetite for acquisition is not commensurate with conditions. While many institutional investors stand sheepishly aside as redemptions reduce their funds, those with capital positions intact are staying away from junior mining.

It could be that a return to market conditions not seen since 1998 is a very real possibility. While that should have the net effect of making mineral deposits more valuable to the senior companies that rely on juniors to maintain their production portfolios, nothing seems to make sense in this market.

James West
Publisher
Monday, September 15, 2008

 

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James West is the publisher of the Midas Letter, a financial advisory service that identifies promising resource industry equities at the earliest stages of their existences. Visit the Midas Letter online at http://www.midasletter.com.