Financing Issues and Consequences
Why read: Because mining exploration and development can be interesting to traders and investors, but those companies have no internally generated cash flow and must rely on continual new equity injections.
Commentary: If you participate, particularly as an investor, in mining exploration and development companies, you ought to read the article referenced in this commentary, and assess very carefully:
the amount of cash each of the companies you are invested in currently has on hand; and,
each company's quarterly spend rate in the context of its cash on hand.
When you do that, make certain that you understand what is being communicated by the website or other data you are taking that information from. Most, if not all, financial data providers show only the balance sheet amounts (cash on hand, short-term securities, and interest bearing debt that each company holds at its most recently reported quarter-end. That typically means that neither:
cash expenditures made subsequent to the most recent quarter end have been reflected in the cash position shown; nor,
any post-last reported quarter financings are reflected in the cash balance.
Over the past three months many people who ought to know have told me how difficult it has been and is for junior explorers and developers to raise new equity. Moreover, where companies have been successful in raising new equity, more likely than not it has been more dilutive to existing shareholders than it would have been at the beginning of 2012.
Because of ongoing sovereign debt and in some cases bank problems, combined with financial markets volatility and general uncertainty, if anything financing for mining exploration and development companies is likely to get worse before it gets better. There are clear short-term and long-term consequences of this:
short-term, exploration and development companies with inadequate cash on hand and an ultimate inability to find creative ways to finance their operations will be acquired, merged, or simply wound up;
if acquired or merged, absent competitive bids those transactions may well occur at what many shareholders will think to be unfair prices. In fact, the prices may simply be 'distressed prices' driven by an inability to source new financing - where the alternative is to wind up the operations;
in the longer term, unless those now 'cashed up' exploration companies are building from a known resources base, in the near term they had better find what initially appear to be commercially viable deposits. This is because new financings are likely to prove difficult for some time to come for companies without known 'expected to be commercial' resource targets.
Topical Reference: Miners forced to get creative as traditional financing sources dry up, from The Financial Post, July 24, 2012 - reading time 3 minutes, thinking time longer.