The late 1990s for the
resource sector was so challenging that it is now often referred to as the
"nuclear winter" of the industry. Some analysts are comparing our
current circumstances to that period, while others purport we haven't hit
bottom yet.
In its Business Risks
in Mining and Metals 2013-2014 report, Ernst and Young states that capital allocation and access is
now the number-one challenge the resource sector is facing. While production-stage companies
are rationing capital expenditures to meet long-term goals, the juniors don't
have this luxury; they need to raise money just to keep the lights on.
The report says the
current situation is the worst market in ten years. Since International Speculator deals mostly with the early-stage
companies, we set out to see exactly how bad it is.
To do that, we pulled
data on 10,521 private placements (PPs) closed by TSX-V-listed metals and
mining companies since January 1, 1999 and compared the financing market now
to the infamous "nuclear winter." Here's
what we found.
The data show that metals
and mining companies closed only 36 private placements in Q2 2003, raising
C$17.6 million. By comparison, so far in the second quarter of 2013, metals
and mining companies closed 150 financings for a total of C$192.6 million.
This clearly shows that the current market, while definitely under pressure,
is not as bad as it was ten years ago.
The market is also
stronger now than in 1999-2001, when little financing activity took place.
That period indeed was a desert for a metals and mining company.
For a clearer picture,
let's zoom in on that period.
Before things picked up
at the end of 2002, the junior metals and mining sector was in a miserable
state for at least two years, as the chart shows. Further, a few large deals
skewed the data; for example, Mazarin Inc. and Regency Gold Corp. raised
about C$10 million each in Q4 2000. These financings were huge compared to
their peers, but wouldn't be considered that big today.
Conclusion
While the current state
of the junior market couldn't be described as strong, these data show we
haven't reached a nuclear-winter phase, at least not yet. Juniors still can
finance, though clearly investors are much less generous now.
Keep that
1999-2001 period in mind the next time someone tries to convince you
the bull market is over. That is what a nuclear winter looks
like.
Our situation is much
better than ten years ago. The best companies are still able to raise funds
to explore and develop. This is where investment dollars should be focused,
because when the market does turn around, it is the better-managed and
better-capitalized companies that will be the first to deliver the tremendous
returns this volatile sector is known for.
|
Despite the spectacular
fall in gold prices in recent weeks, sales of the physical metal are going
through the roof. Is the gold market dying, or is it getting ready to
rebound with a vengeance?
To answer these
questions, Casey Research has partnered with TheStreet
to produce an exclusive video event to help investors sort out the complex
world of the gold market – Gold: Dead Cat or Raging Bull? This
must-see webinar premiers tomorrow at 2 p.m. EDT and features investment
guru Jim Cramer, our own Doug Casey, Sprott Inc.
founder and chairman Eric Sprott, and a number of
other renowned precious-metals experts. Click here to learn more and to register.
|
