A glance at a long-term chart of the VSE Composite index says it all. Since reaching the 1350-level in early 1997, the barometer of the junior mining sector has been on a relentless downward slide. Last fall, it dipped below the 400 level for the first time ever.
The decline reflects the degree of devastation among the ranks of Canada’s mineral exploration companies, which represent about 60% of the VSE’s 1,250-plus listings, since March, 1997, when details of the Bre-X gold exploration fraud reached the investment community.
Before Bre-X, many of these juniors – regardless of where they were listed - were flush with cash and enjoying unprecedented attention from institutional investors.
Now they’re lucky to have an office with a phone line and voice mail.
“At least I still have my secretary,” quipped one junior mining executive when asked about the state of his company in relation to the sector as a whole.
While the Bre-X fraud was the juggernaut that pushed the junior miners over the cliff, falling commodity prices accelerated their decent. Gold, the main exploration target for majority of juniors, has dropped from about US$355 in early 1997 to the US$280 level. Base metals have registered declines of similar scope.
A random selection of previous high-flyers that have crashed includes: worldwide gold explorer Yamana Resources, whose stock has plummeted from high of $6.65 in early 1997 to the 60-cent level; Tenke Mining, which recently declared force majeure on its copper mining agreements in Zaire, down to 25 cents from $6.40; and International Curator Resources, owner of a substantial copper-cobalt-zinc deposit in Baja, California, now trading at 35 cents compared with $12.95 two years ago.
There are many, many more in the same boat.
But the junior mining sector is cyclical and, if history is any judge, the cycle will turn again. Some say it already has.
“The junior mining market reached bottom last September,” says Graeme Currie, a mining analyst for Canaccord Capital. “We are recommending that investors get back into the sector, but on a more selective basis.”
He sees evidence - including a doubling of trading volumes since last fall - that a new bull market for quality junior mining stocks is emerging.
Recent VSE bear markets include the periods from 1983-84, when the index dropped 38%, 1987-1989, and 1991-1992. The discovery of diamonds in the Northwest Territories in late 1991 triggered the junior mining sector’s latest 5-year bull run, from 1992-1997.
In terms of financing, the current downturn is not as wretched as previous cycles, according to statistics compiled by Gamah International, which tracks mine financing trends. In 1998, junior mining companies listed on the VSE raised a total of $300 million, compared with roughly half that amount in 1991.
And in a few isolated cases, new discoveries have revived investor interest, at least temporarily. Nuinsco Resources, for instance, had no trouble raising almost $10 million to drill its Lac Rocher property in Quebec after discovering a zone of high-grade nickel mineralization there earlier this year.
Others, like Western Copper Holdings, have properties with enough potential to attract financing from the majors. Teck recently agreed to supply Western Copper with $2.2 million to continue exploration on the El Salvador base metal project in Mexico in exchange for equity and an option to increase its interest in the property by 5%.
But the majority of survivors are companies that raised substantial amounts of cash before the Bre-X debacle and are now waiting on the sidelines.
“While there are clearly a lot of basket-cases there are also companies with significant kitties that are awaiting better times or our quietly acquiring properties in anticipation of better times,” says Gerald Harper, president of both Gamah International and the Prospectors and Developers Association of Canada.
Some, like Cambridge Minerals, are cash-rich shells that are attempting to break into more investor-friendly sectors such as high-technology. But the outlook looks bleak for companies with just enough funding to keep the office lights on, unless commodity prices improve soon.
“We have a very small window here. Either these companies need to produce a hot hole that makes them individually come to life or the commodity they are into has the come to life”, says John Kaiser, editor of the Kaiser Bottom Fishing Report. “Otherwise, there will be a whole new surplus of fresh shells and even if we do get a commodity cycle going again, the industry is not going to waste its effort on late-life-cycle stocks where the public owns 90% of the paper.”