Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Wednesday, December 19, 2012

Why junior miners suck

It's no secret that junior miners are continuing to do poorly. The reasons include:

1) they are running out of money;
2) nobody cares about their @#%$ drill results;
3) they are caught in a death spiral positive feedback loop brought about by the expectation of low prices, making it hard to raise money, forcing the company to finance at excessively dilutive prices, which helps keep share prices low;
4) company finances are so weak that majors can postpone deals for decent projects until the junior either folds or vends the project for a pittance;
(but you already know all these)
5) and the Aristotlean first cause--NI 43-101 has rendered the business model of junior mining companies obsolete.

Let us review how that business model used to work.

A new company would list and raise a small amount of money at a low price to drill a few holes. With luck, one or more holes would have some promising results--the share price would rise and the company could finance some more work at a higher price. The additional work would hopefully bring about improved results implying an expansion in the area of mineralization. There would be another increase in the share price, and the company would finance again to finance further work. After a few iterations, the company would be able to raise enough money at a reasonable price to finance a program which would define a resource to a high level of confidence, or complete a feasibility study.

Alternatively, the first program would fail to find anything, and the company would be wound up. Thus, either failure (probable) or success would happen quickly. Salaries were minimal, as the principals in the company would have a considerable number of shares or options, so that the early rises in the share price would reward them for their successes.

The business model no longer functions. There is very little movement in share prices from drill results, unless they lead to a favourable resource calculation. This means that enough money has to be raised to define a resource at a very low share price, creating tremendous dilution. It also means that it will take a long time before the project either succeeds or fails. As a consequence, the principals now require salaries (in addition to their shares/options), which greatly adds to share dilution, as these, too, are financed at low share prices. Instead of either succeeding or failing quickly, the process is drawn out over a long time, requiring a lot of money raised at a low price.

What is the effect? In the short to medium term, it means producers will have their pick of excellent prospects from distressed companies which may be acquired at distressed prices. In the longer term it may be the end of discovery of new deposits.

NI 43-101 benefits major companies at the expense of junior miners, as it lowers the cost of picking up projects to replace the ore they mine.

As I have discussed before, NI 43-101 also favours institutional investors over retail investors and large consulting companies are favoured over individual practitioners (it really helps to have a lawyer and an accountant on staff when writing NI 43-101 reports).

Like most legislation, its true intent is the opposite of what has been stated.

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