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This is a harsh reality facing many (if not most) smaller companies that have spent millions (and often years), reaching the point of Feasibility Study. Not only will your operating costs need to look very attractive, but your capital costs of construction will be the deal breaker.
Previously investors would take a “long term” approach to financing. That is not the case anymore and when it comes to mining in particular, bankers and large private investors are scrutinizing these deals like never before. If they don’t, they risk losing their job. And few are prepared to risk their career for a small cap or micro cap company. That is also why it is so hard to find proper coverage of small companies.
And it’s not just the obvious building, equipment, and labour costs of developing a mine. Companies are facing more hurdles with respect to the environmental and escalating costs of power, roads, water, etc. And because mining is often associated with less developed countries, government risk has increased along with labour disputes and disruptions.
When the smoke settles – it is a very different world we are living in since the financial crisis of 2008. And the impact this is having on the junior exploration game cannot be under-stated. No longer can a small company just walk into a brokerage office and plan to raise millions in high-risk capital.
Financings will be smaller, lower priced and require the added bonus of warrants (which fuels excess dilution and share price volatility).
And for those fortunate enough to have cash from two or three years ago, they better manage it well because now it is worth its weight in gold. It may allow the cash rich ones to pick and choose higher quality projects.
Where does this leave the lower quality projects and public companies? Likely adrift in a sea with very few rescue boats.
There is literally hundreds of low quality or mediocre exploration projects publicly traded right now. And hundreds more looking for something. All of these companies hope to raise capital from a shrinking pool of financiers or investment banks willing to take on the risk, and we also have fewer retail investors willing to speculate (because many have lost a huge percentage of their portfolio on these stocks over the past 18 months).
In the junior mining space I personally won’t look at anything that doesn’t have a strong balance sheet, a very high impact exploration project, or grossly discounted proven reserves. And if the company’s share structure is a mess, then that is another serious concern.
Taking this approach means a person will miss out on gains from well promoted stories. But those are few and far between right now. And at some point the valuation has to be justified or the stock will come crashing back down once insiders decide the promotional party is over – or reality sets in that the sector was overhyped (graphite in Q1/12 is just one good example).