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TABLE OF CONTENTS Jan 13 - 19, 2014 Volume 99 Number 48 - 8 comments

Guest editorial: A heap of trouble for the junior sector

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By: Ed Thompson

A pillar of the Toronto mining community, Ed Thompson kicked off the new year by resigning from his many directorships in junior mining companies. As he tells The Northern Miner, part of the reason for doing so all at once was that he was "trying to make a statement to regulators and government bodies that drastic corrective actions are necessary, or a thousand juniors are going to die or be dormant. Probably won’t help but you gotta try." The following are his thoughts on the state of the junior sector:

2014 will be a very slow year for mineral exploration as both the senior and junior mineral exploration companies face a plethora of problems. It is not just one or two problems facing the industry but a multitude as the industry comes off its highs of 2003-08.

For the seniors, they have all faced cost overruns on their projects due to a combination of permitting delays, environmental and social costs and delays, and poor engineering supervision in their attempt to develop projects in remote areas of the world.

Virtually no major mining project in the world performed to specs and the financial markets have downgraded these companies. This negative publicity has rubbed off on the junior markets: If the majors can’t perform, why should we risk our money with the juniors?

The junior exploration companies mainly face a different set of problems due to the structural demands of their financings. To understand one of the basic difficulties, you need to understand how the system generally works. A typical junior raises enough money to carry out exploration for a year, often on one major project and sometimes several small projects. They generally have a narrow time window, due to climate, to do the work and get results. They use these results to raise money for the next year’s programs. If the work is delayed for any reason — e.g. permitting, local opposition, enviros, etc. — the season is lost and the potential investors often lose interest. The share price declines and further financings are tougher and at much lower prices. A death spiral.

There are a thousand junior companies out there at risk and no one seems to give a damn.

The regulators, be they government agencies doing the permitting, security commissions and stock exchanges, and native groups tend to be either ignorant or oblivious to the problems, as none of them have ever run an exploration program.

The environmental groups have cottoned on to the process and use the delays to stop exploration. And now the financial markets are seeing the difficulties and saying, "Hey, why should I invest money into this high risk sector with all these additional burdens?"

Many of the juniors have not helped their own causes by allowing their overhead costs to rise to unsustainable levels, although to be fair, some of these costs have been mandated by the regulators.

And the final straw appears to be the demise of the smaller brokerage houses. The industry now depends on them as the large financing houses have all been taken over by the banks and they want nothing to do with high risk situations. Many of them won’t even allow their customers to buy penny stocks. The smaller firms are having trouble competing and paying for all the new regulations on "know your customer" etc. and are going out of business, so they will not be there to provide financings. First the broker-dealers were driven out of business and now it looks like the small brokerage firms will follow.

The ultimate losers in the decline of the junior exploration sector are the investor and the Canadian public, as no new mines are found and developed (i.e. diminished jobs and tax base).

When will the down cycle end, and what will be the catalysts? That is the 64-dollar question. In my 50-odd years in the business, I have been through eight or nine cycles and we have always recovered, often in a slightly different form. The world needs minerals so eventually exploration will resume, but I think that it is time for governments and regulators to start looking at the problems they have caused.

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Reader Comments

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Junior company President

The first comment that the market will come back because it always has before is invalidated by the recent tightening by regulators, led by Robert Holland at the BC Securities Commission. This zealot has led changes that the 43-101 Committee followed like lemmings over a cliff that have separated Canada and Canadian companies from the rest of the world. There is one basic standard for the rest of the world and another, harsher standard for Canadian companies.
There is also international distrust for the Canadian environment because of this.
While markets have recovered in prior decades, this one is different because the bulk of the companies simply cannot function in the harsh regulatory environment. For example, I was quoted $45,000 by a geologist to do a desktop 43-101 report, plus business class travel and a grand a day to do a site inspection - when I inquired why the price was so high he said "market price". Junior companies cannot tolerate this arrogance and cost just to satisfy zealous regulators.
I don't see the Canadian junior market returning.

Posted January 14, 2014 12:54 PM

Luca Riffer

As the author points out, resource veterans have seen this movie many, many times before. 2014 should be the year of the 20-for-one reverse split, which will bring that unique breed of cockroach investor out of the weeds and will set the stage for a selected number of 10- to 100-baggers three to five years out. I've got my chequebook ready, just waiting for the penny stock splits . . and yes, if you are a junior mining director, a resignation this year will release you, like Mr. Thompson, from blackout constraints to reload your portfolio.

Posted January 10, 2014 07:08 PM

Mark Fekete

Mr. Thompson has hit the nail on the head with respect to regulators. Every single minister responsible for mining in Canada, be they at the federal, provincial or territorial level, talks in glowing terms about the contribution that mining makes to the economy. However, this endorsement for the industry is not backed up by rational or favourable policy towards exploration and mine development. What other industry in Canada (with the exception of energy) is expected to take on the inherent responsibility of government by negotiating with and compensating various native bands, municipal governments and other interest groups to obtain “social licence” for its projects. It is tempting to blame environmentalists, natives, the press and foreign markets for our woes. In fact it is the lack of political leadership and the hostility of the bureaucracy towards resource development in Canada that is killing the mining industry.

Posted January 10, 2014 01:15 PM

Dick Beard

Too bad none of the Ontario politicians will read this, or if they do, they will ignore it in order to buy more southern Ontario votes.

Posted January 10, 2014 01:13 PM

Brad Bowman, P. Geo.

A Major contributor factor is the FN Issue, and yes, I might as well call myself a Racist, before everyone in the GTA and the FN does. The Ring of Fire is the best example of what has become a "bring your check book, if you want to Explore", Ontario Government Policy. The Sector is dead; time for a Funeral and a new Career.

Posted January 10, 2014 06:36 AM

Kerry Knoll

You are right on with these comments, unfortunately including the one about nobody giving a damn. One thing the junior mining industry did (including the promoters and the brokerage firms) is mint too many junior companies. Probably one in five has a decent project. Many of those 20% or so that have a chance of becoming a producer could die before things get better. And the losers will be the shareholders who put up the money. The regulators should think a little bit about those people.

Posted January 9, 2014 11:06 PM

Tony Simon

Excellent description of the structural problems facing the exploration sector.

An addition to the "Ultimate losers" list: Canadian expertise in mineral exploration - the only industry where Canada has achieved world dominance. Now we are going to allow bureaucratic mindsets to destroy our position.

Posted January 9, 2014 10:47 PM

Bruce G LaVgne

Finally, some one of substance saying it like it is. The government has a strategic rule to play
Making sure the pedulumm doesn't swing to far in any one direction.

Posted January 9, 2014 07:35 PM

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