On October 17, 2013, the BC Securities Commission released a report titled “BC Junior Mining at a Crossroads: Executive Management's Perspective” (the full report is available through the BCSC here). The report was prepared by KPMG on behalf of the BCSC and was based on interviews with 15 senior executives of junior mining firms based in British Columbia (“Juniors”)1.
The intention of the study was to better understand industry perspectives, challenges, and sentiments about the current downturn in the junior mining sector. The report’s findings can be categorized into three broad areas of focus: (1) the degree of success Juniors have had in obtaining financing and what type of financing is available for Juniors (the “Financing Focus”); (2) the factors that are believed to have contributed to the success or lack thereof in Juniors obtaining financing (the “Issues Focus”); and (3) proposed solutions to deal with factors that are, or are perceived to be, limiting availability of financing for Juniors (the “Solutions Focus”).
Although most of the Juniors interviewed indicated that they were successful in raising their targeted funding from the market in 2010 and through to early 2011, there was a distinct change in their ability to raise funds from mid-2011 to 2013. All participants indicated that current market conditions are not favourable for attracting retail and institutional investment in Juniors.
The report provides a detailed review of four sources of financing and the relative success that participants have had with each, as summarized in the following table:
Click here to view table.
The report identifies the following two root causes that have led to the current issues facing Juniors seeking financing:
Unfavourable Market Conditions. There were a number of factors identified as to why market conditions were unfavourable to Juniors. General economic conditions, including falling commodity prices, a slowing demand for metals, and global financial issues such as the debt crisis in Europe were identified as significant factors. A lack of interest in Juniors was also attributed to the fact that Juniors are perceived to be a less liquid investment, as well as a consistent streak of negative media coverage of the mining sector. Participants also pointed out that senior mining companies are not interested in acquiring additional properties or projects from Juniors until they have strengthened their own balance sheets and resolved other operational issues. Finally, participants pointed to the fact that the demographics of investors are changing. Investors who have traditionally invested in the junior mining sector are now older and, as they have aged, their investment strategies have become more risk-adverse.
Regulatory and Governmental Factors. Responses were mixed with respect to whether reporting requirements of the BCSC and TSX Venture Exchange were too onerous. Many noted that a more flexible system with more tailored requirements could help Juniors. With documentation and other costs for an IPO easily reaching $150,000 to $250,000, this approach to raising money in small amounts is impractical. In addition, almost all participants indicated that they have noticed inconsistent review and enforcement of regulations by the BCSC. The result of some of these regulatory issues was that some participants felt that they have had to redirect their efforts to ensuring their company is compliant with BCSC and TSX-V reviews instead of focusing on their core business of mineral exploration. Finally, participants highlighted the role of the BC government as having a negative impact on Juniors’ ability to raise money. While participants pointed out that the role of the BC government in promoting the industry through the BC Jobs Plan and the Mineral Exploration and Mining Strategy has provided some assistance, they also noted that the efforts were directed more towards development and operation as opposed to exploration activities. Finally, some participants expressed concern regarding the costs, delays and inconsistencies in the regulatory oversight of the BC Ministry of Energy and Mines, as well as the fact that the Province has created an environment where the mining industry has had to step in to deal with issues in respect of First Nations that could be better managed by the Province.
All participants identified the current financing situation as cyclical, though possibly worsened by some of the regulatory issues highlighted in the report. The report describes the basic message as “wait it out – the market will come back.” However, participants identified two ways by which the BCSC could assist Juniors during this difficult stage of the market cycle: (1) facilitate an even playing field by ensuring that review and enforcement is consistently carried out; and (2) create a more tailored and flexible set of reporting requirements for Juniors to accommodate their smaller operating budgets compared to larger mining companies.
Participants differed in forecasting the upturn of markets, but most agreed on similar short and long term effects of current market conditions on the junior mining sector. In the next one to two years, participants generally agreed that Juniors will have to find innovative ways to sustain day-to-day operations and expect private placements and non-public offerings to be the major source of financing. In the long term, participants generally felt that the exodus of some mining companies in the short term would allow the surviving companies to regain momentum and rebuild investor confidence. There was some concern among participants that one long term consequence of the current financing situation is that many independent brokers will have turned their focus away from the junior mining markets or closed up shop, leaving a dearth of intermediaries in the marketplace.