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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