Canadian junior miners face months of challenges yet, says industry report

MONTREAL - Canada's junior mining companies, hit hard by low metal prices and tight financial markets, still face months of challenges after the sector's market value dropped to the lowest level in at least six years, according to an industry report.

"We don't expect any improvement until the end of the first quarter of 2014," said Nochane Rousseau, the report's author and the Quebec mining leader at PricewaterhouseCoopers.

While market conditions won't necessarily worsen, small companies will continue to feel the pressure through next April or May by continuing to burn cash amid challenges in raising financing. About half of the companies have changed CEOs and larger miners are also cleaning their own houses and not at the buying stage.

"If they are not able to merge or to sell their asset then for some of them they may have to close their business or to be delisted with the (TSX Venture) Exchange."

Junior gold miners, which account for 41 per cent of the top 100 firms, have been particularly hard hit in the past year.

The market capitalization of all junior minors fell by about half in the past year to $11.1 billion, according to the report.

As of June 30, the top 100 accounted for $6.5 billion of that total, down 44 per cent from 2012. That followed a similar slide in 2011 when the value peaked at $20.6 billion.

The sector has been on "a downward spiral since 2011, when commodity prices were at or near record highs and markets recovered from the devastating impact of the 2008-09 global financial crisis," said the annual report released Monday.

The accounting firm said the mining companies listed on the TSX Venture Exchange also saw their cash and short-term investments drop by $695 million to $1.2 billion.

The entire mining sector is facing a "confidence crisis" and that junior companies are hardest hit, said the firm's global mining leader.

"The junior mining sector is not for the faint of heart," wrote John Gravelle.

He said the activities of the smaller mining companies are dependent on the market mood and commodities prices.

When the recovery comes, investors will likely first allocate money to senior producers given their stronger balance sheets and proven production and profit-making capabilities.

"That means many juniors will need to be even more patient with their plans, and have as much cash on hand as possible to wait out the uncertainty," he said.

But generating cash has been challenging. The amount generated from financing activities fell 34 per cent, on top of a 52 per cent drop in 2012. Net losses among the top 100 companies collectively increased 60 per cent from 2012 to $549.6 million as revenues fell 25 per cent to $871.8 million.

Only three paid a dividend last year — Sierra Metals (TSXV:SMT), Callinan Royalties Corp. (TSXV:CAA), and Midway Gold Corp. (TSXV:MDW), which only paid preferred dividends.

The report said companies have cut expenditures, including stopping exploration work, while others will only survive by merging or accept takeover bids.

About one-fifth are no longer listed on the Venture Exchange, seven graduated to the TSX, 10 were acquired or merged and one was delisted.

Writedowns surged to $87 million for the year ended June 30, up from $32 million in the prior year.

The top 100 raised $795 million in equity financing, down by half from $1.6 billion in 2012, with only four of 15 producers raising more than $1 million.

The number of initial public offerings has fallen by more than half in the past three years to 24 in 2013, down from 52 in 2011.

About 64 per cent of the junior miners in the top 100 had headquarters in British Columbia, 16 per cent in Ontario, 10 per cent in Quebec and two per cent in Alberta.

The mining sector is a shrinking part of the TSX Venture Exchange. It represented 35 per cent of its $32 billion market capitalization, down from 51 per cent of $40 billion in 2012 and a 38 per cent drop from 2011. There were no mining companies with a market cap of more than $500 million.