Only The Good Junior Gold Miners Will Survive In 2014 – Analysts

By Alex Létourneau of Kitco News
Monday December 23, 2013 11:05 AM

(Kitco News) - A roughly 11-year bull run in the gold market opened the door for a galaxy of new junior miners to flood the industry, but according to analysts, only the strong will survive in 2014.

The long uptick in gold prices brought loads of new companies looking to mine and produce low-grade discoveries, which was more viable with gold prices consistently pushing new highs until 2011.

With this new lower gold price environment, if the juniors don’t have higher-grade projects, coupled with some cash to spend, they will most likely peter out in 2014, analysts said.

“There are around 500 companies with negative working capital totaling $1.6 billion,” said John Kaiser, founder of the Bottom Fish newsletter. “They’re still listed, but they have no ability to do anything. They are zombie companies; they are like the undead.”

In a conference call with analysts from Dundee Capital Markets, Laurence Curtis, vice president and senior analyst of global resources, also called for a mass exodus of the weak.

“They will get wiped out, a number of them, and that’s healthy,” Curtis said. “The general consensus is way too many them came through this last flourish. I remember going through the post Bre-X era and we saw the same thing.”


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Curtis noted times were different then and does not share the optimism he had during that time.

“There’s a difference here, though. We had hope back then. I think this time we’re abandoned and a number of those juniors won’t get the money, even to keep the lights on,” Curtis said. “Mid to late next year, there will be a big cleansing and only the best will survive. It’s Darwinian in its concept but I think that’s where we’re at.”

A lack of capital in the mining sector also makes it difficult for all mining companies in the sector, let alone distressed juniors.

“The companies with negative working capital, nobody wants to fund dead money,” Kaiser said. “These companies, and right now my tally is up 817 companies with less than $200,000 left, those which are still in the black and don’t have old payables that they need to find a way to get rid of, they’ll probably be able to do small financings.

“Another problem is that 500 companies have a market cap of less than $1 million, which makes it very difficult to raise any kind of money without going to shareholders, and nobody is bidding up the prices of these stocks in the current market,” Kaiser said. “Private placement financing on the TSX Venture has dropped to $200 million a month, which is back to the levels of 2003. The situation is extremely dire.”

What could help some of these juniors in reasonable shape, with decent projects, is the possibility of some mergers and acquisitions.

“The subtle cause for optimism for some of the, call them the more prominent junior gold miners, is this phenomenon that happened in 2013 where some of the majors decided they would cut their exploration spending and focus more on the junior miners with interesting projects, rather than (companies) doing their own exploration,” said Bruce Sprague, Ernst & Young’s Canadian mining and metals leader. “I would think that strategy will continue given the fact that the majors have been reducing their exploration spending, and in some respects signaled that they would contemplate if it was the right opportunity.

“We continue to see these looks, if you will, of alternative sources of financing. Teams like Sandstorm Gold, Silver Wheaton,” he added.

It wasn’t a very busy year on the M&A front, less busy than anticipated by analysts, but there has been an uptick in the latter half of 2013, especially in December.

On the conference call with Dundee, Josh Wolfson, vice president, senior analyst, gold and precious metals, said the type of transactions to expect in 2014 will be more along the lines of consolidation between smaller companies.

“The historical transactions have been more along the lines of growing production. Now there’s actually an interest in providing higher IRR’s (internal rate of return) in which case you move away from high capital, large deposits that lean more towards better economics,” Wolfson said. “The problem in the market is that there are very few quality projects out there, at an advanced stage to give a larger company the comfort of acquiring it.”

Another point of interest for junior miners is the BCSC 45-106 Prospectus and Registrations Exemptions, which, according to Kaiser, will have an impact on the junior sector, as it gains support from other securities commisions.

“What they finally realized is that the retail investor has become completely alienated and the only role they have played in the last decade is to buy paper sold by either existing shareholders or the algorithmic short traders,” Kaiser said. “So there is this re-empowerment of the retail investor move under way.

“The model is quite elegant. What they are proposing is if they do not meet this accredited investor definition, you will be allowed to invest through private placement, with the same sort of four-month hold restriction, up to $15,000 per company, per 12-month period, provided you own shares in that junior when the private placement is announced,” Kaiser said.

“If this passes, it will broaden the base substantially of people who can put money into the treasuries of companies and hopefully get some money in there for the work progress,” he added.

By Alex Létourneau of Kitco News; aletourneau@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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