Cost of capital scorching juniors: Cormark report

For investors wondering why their favourite junior mining stocks have plummeted so far below the value they may hold in the ground, a new report from Cormark Securities sheds some light.

According to the report compiled by three of the firm’s analysts, recent deals for miners have shown the cost of capital rising to unsightly levels.

The ugliest figure belongs to Yukon-Nevada Gold (YNG-T, YNGFF-o), whose total cost of capital comes in at 40.9% for the year (including interest, discount to face value, and cost of warrants and convertible options). Also ranking high was Moly Mines (MOL-T, MOL-a), whose total cost of capital came in at 35%.

Yukon-Nevada shares closed at 4 in Toronto recently, after trading in the $1.70-range at the beginning of the year. At presstime, Moly Mines was at 21, after trading in the $3-range at the start of the year.

Cormark says juniors have been hit especially hard with equity markets closing down, forcing companies in need of capital to turn to loans.

And that has lenders holding all the cards. The present environment leaves managers of juniors with the stark choice of either “signing their companies away to obtain relatively small amounts of debt,” or not doing anything and being unable to advance their projects.

“Usually, equity markets act as an important counterbalance to the debt markets but at present, equity financing is nonexistent except for special cases.” Such a special case, the report offers, would be Canadian flow-through financings.

And while the authors of the report, David Stein, Justin Reid and Andrea Cheung, don’t see the current conditions carrying on for the next 12 months, they aren’t forecasting a snap back to the good old days either.

“We expect that financing will be available for smaller, high-return, low-risk projects first and that we will see a combination of equity and debt financing lower the overall cost of capital for junior mining and exploration companies,” the report says.

The group says it is now using a 15% discount rate as a base case for unfinanced projects. For financed or near-term projects, the number drops to a 10% discount.

The current environment means that companies operating in politically volatile regions, notably the Democratic Republic of the Congo (DRC), Ecuador and Venezuela, are and will continue to feel the pinch more severely.

Several analysts polled by The Northern Miner said they were increasing to 15% the political discount for companies in the DRC.

When combined with the 15% base case discount Cormark is using, the resulting 30% discount rate would be devastating to valuations of juniors operating there.

Other companies feeling the heat, according to Cormark, are: Nova-Gold Resources (NG-T, NG-x), Mirabela Nickel (MNB-T, MND-a), Augusta Resource (AZC-T, AZC-x), General Moly (GMO-T, GMO-x) and PolyMet Mining(POM-T, PLM-x).All received downgrades to their respective recommendation levels.