Although the PDAC convention drew more than 30,000 registrants from 125 countries to its 81st convention – about the same number as the record set last year – there was speculation that for some juniors, the 2013 gathering may be their last.
According to independent U.S. analyst John Kaiser, roughly 20% of the 527 junior companies registered for the PDAC have less than $200,000 in the bank, enough to maintain an office for a few more months, but not nearly sufficient to finance exploration. He warned that the flight of equity capital has undermined the value of junior projects so severely that the sector is vulnerable to takeovers by cash-rich foreign entities.
“There’s going to be a massive binging buyout, maybe by the Chinese, of ounces and pounds in the ground,” he said at an international panel luncheon on March 5th where the fate of the junior sector was debated.
Equity investors averse to risk and disappointed by the progress of several gold projects are abandoning the sector, resulting in a 20% drop in the value of the S&P/TSX Venture Composite Index – the bellwether of the junior mining sector – in 2012. Even though commodity prices remain robust, only juniors with the most advanced projects are able to turn to the stock market for cash.
As a result, a 3-year boom in exploration that took spending to record levels of $21.5 billion globally in 2012 is likely to come to a halt this year, according to a special report on exploration trends by the SNL Metal Economics Group, even though the research group expects spending by producers to remain steady.
“Due to the limits imposed by ongoing market volatility, the size and scope of many junior budgets remain dependant on investor interest over the first few months of 2013,” the report concludes. “We forecast that the junior sector as a whole will spend less than in 2012….”
Because gold accounts for more than 50% of global exploration spending, one factor that could revive the junior sector is a rising gold price. Although the price dropped below the US$1600 per oz. level recently as investors became more optimistic about global economic conditions, all three panellists at the international panel luncheon –Kaiser and financiers Eric Sprott and Ned Goodman – expect gold to continue its multi-year ascent in 2013.
Sprott, who oversees about $10 billion in investments as CEO of Sprott Asset Management, estimates that for every 10% move in the price of gold, gold stocks respond with a 20-30% adjustment. That correlation has damaged the sector so far in 2013 as gold has tracked downward, but could just as easily buoy gold stocks if momentum shifts to the positive.
“I’m buying gold stocks everyday,” agrees Goodman, president and CEO of Dundee Corporation. “Gold is real money, a hedge against the stupidity of the markets.”
Meanwhile, expect much more consolidation in the junior sector as companies pool their cash and assets to survive, and more joint ventures as miners try to “derisk” their projects, said PricewaterhouseCoopers' John Nyholt in a special session on financing in volatile markets.