UNCERTAIN PROSPECTS

Devastated by record low nickel prices which, at the time, appeared to be on a perpetual downturn, Inco was burdened by immense operating losses, excessive debt and little cash for mineral exploration (Inco, of course, wasn’t alone; most of the other big base metal producers were in the same boat ) Juniors in 1986 tapped the flow-through financing gravy train, which pumped up to $1 5 billion into exploration by the end of 1987

This relationship came to an abrupt end on the infamous Black Monday of Oct 19 Compounding the effects of the crash and the evaporating equity base needed to fund low-capitalization junior companies, gold prices began to fall In contrast, however, and to almost everyone’s surprise, base metals began to take on a magical quality as rising prices shattered records almost on a monthly basis

The cumulative result has been that junior mining companies are suffering and major miners, especially the base metal producers, are in positions of immense strength The catchphrases in the exploration game time this year are “cash flow” and “quality” — cash flow, which enables a company to survive, and quality in projects and management, which still draws equity dollars to treasuries

“Hard dollar financings are still tough,” according to Michael Pickens, a mining analyst with Yorkton Securities In Quebec, for example, it’s almost impossible to raise equity funds, he says Pickens does note that “the mood (of investors) seems to be getting better, but it’s still hard to get them to write the cheques ”

The bottom line is less exploration in 1989 Nothing has had a greater impact on exploration activity than flow-through After soaring to a record expenditure of almost $1 2 billion in 1987, funding declined in 1988 to almost $4 billion By the beginning of 1989, it was evident that this would not be a turn-around year

Most of the national flow-through funds peddled to tax-shelter investors report closings well below their established maximums And in some cases, several smaller limited partnerships failed to reach their minimum sales targets and were forced to fold Other signs of the downturn in the exploration industry come from the contract industry that services the exploration sector “It’s dismal out there,” says one consulting geologist, who refused to be identified

A glut of drill rigs is taking its toll on the drilling industry, which has a sizeable percentage of idle rigs “We don’t really know what’s going to happen,” says Dare Fowler, president of N Morissette Canada, a well-known Canadian drill operator “Certain contractors will survive, but others will find it difficult ”

The big unknown is the Canadian Exploration Incentive Program (ceip), a grant program created by Ottawa to replace the original, highly successful flow-through scheme Ceip only applies to money raised after Jan 1, 1989 “The first applications for grants are expected by April or May,” explains Robert Clark, director of technical support for ceip Although the new system appears to be as good a deal as the original scheme (if not better), there is uncertainty over its effectiveness in getting funds to investors quickly and with minimal bureaucratic delays If ceip operates smoothly, many feel it will be good for exploration

With these numerous constraints, Canadian exploration and the junior mining sector will continue to suffer However, quality exploration plays will continue to attract investors’ dollars “In all my years in the mining business, I’ve never seen so much opportunity as today,” says Malcolm Slack, a well-known mining engineer and resource entrepreneur That sentiment has not gone unnoticed by cash- rich senior companies

Mergers and restructurings are the order of the day, and 1989 should see this trend, established in 1988, continue if not accelerate Also, the phenomenal strength of base metals should result in increased exploration for copper, zinc and nickel this year “There’s an awful lot of interest in base metals,” Pickens says Surprisingly for the juniors, the trend to base metals exploration is one they failed to spearhead Such was not the case with gold and platinum exploration several years ago

There is little doubt that 1989 will be anything but dull With a bear market in golds and a bull in base metals combined with the uncertainty over flow-through and ceip, the contrasts between the haves and have-nots ar e intensifying

But as Pickens adds wryly, “it’s nothing a $50 jump in the price of gold can’t fix ”

]]>