Fitch Ratings

Another sharp drop (18%) in the Mining Eye index over Q4, 2014 closed out a tumultuous year for AIM junior miners, bringing the index to a net loss of 42% over the year.

This represents the steepest annual fall since the global financial crisis, and an unprecedented fourth consecutive year of decline.

This is according to a recent EY report, Mining Eye Q4 2014, a sombre end to a dismal year. In summary, the report indicates that AIM-listed juniors are experiencing massive financial difficulties and turnmoil, as outlined below:

The year 2014 will be remembered for the severity and speed of commodity price falls - particularly iron ore - that very quickly rendered higher-cost producers vulnerable, and that effectively wiped out any hopes of a quick resurfacing of investor confidence in the sector.

For junior miners, the overwhelming theme has been how this has translated into a persistent and widespread unavailability of equity capital and plummeting share prices.

Falling from grace

Equity proceeds of just £443 million were raised by AIM’s juniors in 2014 – an increase of 58% on 2013, but from a very low base, and some 82% short of 2007’s peak. Only £6 million of that total was raised from new issues, with IPOs remaining firmly off the agenda.

The dominance of the mining sector on AIM has diminished in tandem. Mining shares are now worth just a third of their value 12 months ago at £3.6 billion, representing only 5% of the whole AIM market, the lowest proportion since we began tracking in 2004.

AIM’s juniors have also significantly underperformed their counterparts in Toronto. This is in part due to the declining prominence of iron ore companies in London, such as African Minerals (which dropped out of the index at the end of 2014 for the first time since 2009), and to the comparative absence of an established gold investor base that supported Toronto’s juniors during periods of positive gold price swings.

Dramatic exits

The market conditions have inevitably taken their toll. A total of 15 companies de-listed over 2014, of which around two-thirds were for reasons associated with the challenging conditions. The exit of London Mining in Q4, following its entry into administration and subsequent sale to Timis Corporation, is perhaps the most dramatic example of the rapidly evolving consequences of price collapse and subsequent liquidity shortfall. Unfortunately, London Mining is unlikely to be the last to make such an exit.

Shareholder unrest

Meanwhile, it is a sign of the times that a large number of companies announced board changes in Q4, 2014. Many of these changes were the result of resignations and/or strategic shareholders wanting greater control over how businesses are run and their investments spent.

EMED Mining’s 19.35% shareholder Trafigura sought to requisition an EGM regarding the appointment of four of its own nominated directors to the board, while Mwana Africa received notice of a court petition from major shareholder China International Mining Group Corp disputing the validity of Mwana’s reappointment of a company director in September.

Survival of the fittest

It is easy to lose sight of the bright spots among all the gloom, particularly when project or funding progress has been met with seemingly arbitrary and punishing share price falls.

A number of AIM’s explorers have managed costs and funding successfully enough to push ahead with their activities, with Bushveld Minerals, KEFI Minerals, Sable Mining Africa, West African Minerals, and Scotgold Resources among the companies announcing maiden resources or resource updates in recent months.

KEFI Minerals announced it had received the support of a new cornerstone investor, Perth Global Funds, via a conditional £3 million equity placement for a 15.7% stake.

Sable Mining Africa announced the signing of a major infrastructure agreement with the Government of Liberia in January 2015 over the export of iron ore from the company’s Nimba project in Guinea.  Neither company saw net share price gains over the quarter (in fact, their progress earned them respective losses of 22% and 58%), but nevertheless demonstrates the existence of support from investors with longer-term vision.

There were also some positive funding stories, including Shanta Gold’s US$40 million loan from Investec, paying interest at three-month LIBOR +4.9%, to redeem an existing loan paying three-month LIBOR + 6.5% and as standby funding for the Luika gold mine.

Mwana Africa’s 74.7%–owned subsidiary Bindura Nickel won the support of the Zimbabwean government for a US$20 million corporate bond for the development of the Bindura Nickel Smelter. The bond was granted liquid and prescribed asset status by the Reserve Bank of Zimbabwe, requiring Zimbabwean asset managers to invest a minimum percentage of their assets under management into the bond, and opening up access to the bond to long-term savings institutions.

Uncertain times ahead

The world’s leading equities are reaching new heights in early 2015, but it’s unlikely that we will see the same for the bulk of mining equities in the coming months while near-term commodity fundamentals remain weak and the economic outlook so uncertain.

However, commodities will recover at different rates, with favorable price swings opening up windows of confidence in equity markets. Furthermore, it is reasonable to assume that persistently depressed equity valuations among juniors, along with the gradual positive effect of supply corrections across the industry, will eventually attract interest from counter-cyclical, longer-term investors that recognize a strategic and competitive advantage to investing in the sector’s quality projects and management teams at this time.

Alternative finance will also play its role, but investors and lenders will be more selective and discerning than ever. Those advanced juniors lucky enough to attract project funding will need to manage increased funding complexity and risks if they are to navigate the prevailing market volatility and emerge with successful projects, cash flow and ultimately strong returns for shareholders.

Click here for the full report.

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