Juniors seek alternatives to fund exploration plans

With most companies witnessing their shares prices near historic lows, the majority of the juniors have also seen their traditional financing sources shrivel up and disappear. Where money was once thrown at virtually any grass-roots exploration project, investors today are restricting themselves to quality projects. Quality meaning projects displaying drilled-off reserves, reasonable grades, above average probability of production and strong management.

Out of this bleak financing landscape have come several alternatives — mergers and private placements with major mining companies. The major gold producers remain flush with cash from production of gold at costs well below the current gold price. In the base metals sector, record high commodity prices have provided Inco, Cominco, Falconbridge, Teck and Noranda with a financial bonanza the likes of which have not been experienced since th e 1960s.

The bottom-line of this contrast between the haves and have-nots is that it’s a buyers’ market out there. The most recent example is the cash takeover bid by Corona Corp. (TSE) for control of Dickenson Mines (TSE) and its affiliate holding company, Kam-Kotia Mines (TSE). Corona is offering $2.50 per share for each Kam-Kotia share and $7.15 for each Dickenson multiple voting B share.

For major gold miners such as Corona, the current downturn in the gold sector provides an opportune time to buy gold reserves at attractive prices. Other cash-rich majors aggressively scouting for acquisitions include Cambior Inc. (TSE), Placer Dome Inc. (TSE), Hemlo Gold Mines (TSE), Echo Bay Mines (TSE) and American Barrick Resources (TSE).

“Over 200 equity transactions were completed in North America in gold projects,” Michael Chender, editor-in-chief of Metals Economics Group explained to The Northern Miner. These were non-market private placements made by major companies in smaller companies with advanced gold mining projects. “In 1989, I expect similar financing activity will slow down,” Chender adds.

His assessment is based on the fact that gold prices are much lower than the 1988 average of about $450 per oz. “In 1987 and 1988 there were no bargains yet the market was overheated. With no bargains in a falling gold price, things have slowed down.”

With respect to traditional equity financings, Chender says that this segment remains particularly depressed. “In retrospect, a lot of money went down the hole,” he says, commenting on the 1987 boom when equity dollars were being attracted by even technically dubious projects. “Many companies hurt their credibility and investors are staying away.”

Brokers and mining analysts agree. “The word (for the markets) is miserable,” Paul Esquivel, a mining analyst with Yorkton Securities says. The climate for junior resource financings “is even worse than in 1982,” the year when the last major equities bear market began. Esquivel sees the situation dragging on for several more years, adding that “retail people are really nervous about doing junior issues.”

With hard dollar equity financings difficult to complete, what’s left to tap into? According to Chender, “if there is a financing niche it will get filled up.” He refers to the creation of several funds in the U.S. this year, which are planning to finance advanced mining projects to the bankable feasibility stage. The funds will also have first rights on project financing.

Another source of exploration financing in Canada remains the flow-through share. A huge success, especially in 1987 when flow- through expenditures in Canada exceeded $1 billion, far less is expected to be spent this year. A key component of the flow-through scheme this year is the Canadian Exploration Incentive Program (CEIP), created by the federal government to offset the loss of the 33.3% earned depletion allowance which was eliminated in the last federal budget.

CEIP will provide a cash grant of 30% on eligible exploration expenditures, which provides a tax benefit similar to that offered by the original flow-through program. Despite its attractiveness, investors remain cautious. Although tax benefits remain the primary feature of flow-through offerings, investors are seeking quality mining projects which also provide a good probability for capital gains.

The late 1980s have also witnessed an increasing influx of foreign money moving into Canadian companies and mining projects. From small private placements completed with institutional investors in Europe to large deals with offshore multinational mining companies, foreign investors have pl ayed an increasingly important role in funding Canadian mining projects.

MIM Holdings, an affiliate of MIM, a large Australian mining company, made the most recent acquisition — a $50-million private placement in Granges Exploration (TSE), a mid-sized Canadian gold mining company in need of cash. Control, or 33% of Granges, will pass to Australian hands. In late 1987, Western Mining Corp., triggered a wave of similar acquisitions and private placements. The Australian company surprised many seasoned mining investors with its swiftness in spending more than $500 million on North American gold mining deals. That swiftness also cost Western plenty — in cash and embarrassment following its $90 million buyout of Seabright Resources, a company with few gold reserves.

Despite the difficult environment, pools of capital, albeit smaller than in previous years, are available to junior companies. However, smart money will only be seeking quality exploration projects. This constraint will place the onus on the management of junior companies to focus their attention on acquiring projects in an advanced stage of development. Grass-roots exploration will have to rely almost entirely on flow-through and cash from well-funded companies earning interests via exploration expenditures.

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