Juniors struggle to raise necessary financing

Junior mining companies in Canada, slowed by a slumping economy, can only look back fondly at the heady days of the late 1980s when financing for exploration programs was readily accessible. Flow-through funding, which provided a tax writeoff as high as 167% on each dollar invested, has been cut back drastically by the federal government and no longer seems to add much stimulation to the market. Trying to raise money in a down market, through the issuance of shares or by borrowing, is said to be a frustrating, if not an almost impossible, task.

“The current recession has had a uniquely severe impact on the mining and exploration business,” the president of Armistice Resources (ME), Frank Smeenk, recently told his shareholders. “There is no equity available; there is no debt available.”

During the latter part of the last decade, Armistice was able to raise about $16 million in flow-through funding for its gold exploration project at Virginiatown, Ont. Unfortunately, cost overruns took total expenditures to almost $18 million, and the junior has had to struggle since to reduce that debt.

With money in short supply, Armistice, wishing to continue testing the potential of its deep exploration project, decided to option an interest (up to 50%) in the property to another mining firm.

The price of gold (around US$360 per oz. at the time of writing) has not been kind to small or junior producers of the precious metal. In a report published in January, analyst Michael Fowler of Haywood Securities stated about 60% of junior gold producers his firm has been following lost money during the first nine months of 1990, and only one-quarter of those firms earned more than 10 per share.

“Financially, many are highly leveraged and produce insufficient cash flow to meet capital expenditure or debt requirements. Consequently, the junior producers are fighting for their very survival,” Fowler wrote. The outlook, he continued, “is grim as companies focus on repairing balance sheets by asset sales, mine shutdowns and debt-for- equity swaps, and we feel that fewer producers will be around in one year’s time.” Among seniors, exploration is a must in order to shore up new (and replacement) reserves. LAC Minerals (TSE), aiming to become a million-ounce gold producer, reported spending US$39.5 million on exploration in 1990. Metals giant Noranda (TSE) said subsidiary Noranda Minerals and its associated companies spent about $140 million on grassroots and project-level exploration in 1990, and a similar amount has been budgeted by the same companies for 1991. Deal-making hasn’t stopped, of course. Some juniors continue to spin agreements, with the transactions invariably involving a senior. Exploration Orex (ME), for example, recently signed a deal with Minnova (TSE) whereby the latter may earn a 60% interest in Orex’s Goldboro gold project in Nova Scotia by spending $5 million on exploration work and making two private placements worth a total of $1.25 million. MSV Resources (ME), wishing to see its Eastmain gold deposit in northwestern Quebec near James Bay enter production in the near future, signed a joint venture agreement with Meston Lake Resources, a unit of Campbell Resources (TSE), as a means of raising the necessary cash to get the project up and running. Meston, which could earn a 50% interest in Eastmain, operates the Joe Mann gold mine near Chibougamau, Que. A common shareholder of MSV and Campbell is Northgate Exploration (TSE).

At the Castle Mountain gold property in California, Viceroy Resources (TSE) recently struck a deal to sell a 25% interest in the heap-leach project for US$17.5 million. (The buyer, MK Gold, is a wholly owned unit of an Idaho contract mining firm.) With the transaction, Viceroy has raised enough money to cover the expected US$50 million capital cost; an already secured loan facility with N.M. Rothschild & Sons covers the balance. The heap-leach mine project is expected to be in production by year-end.