It’s been a tough few years for the mining industry. However, as mining industry executives are reporting in this year’s Junior Mining and Exploration companies (JUMEX) survey, conditions are slowly improving. Now junior miners can use the lessons learned during the downturn to position themselves for sustainable growth.
The 2016 JUMEX survey, prepared by the Energy & Natural Resources team of Grant Thornton Australia, provides a comprehensive overview of the market in Australia. It also looks at general themes applicable to the wider global mining industry and, for the first time, includes insights from investors in the sector.
I am delighted to say that it shows the most positive outlook for junior miners that we've seen in years.
But conditions are still challenging. Half of junior miners report that they expect lack of equity funding to constrain their business next year. In addition, there are still serious concerns about regulatory pressures, financial markets and commodity volatility.
Nevertheless, overall, the industry appears to be in better shape than in the last few years.
First off, the general outlook for commodity prices has improved. Demand for iron ore is holding and prices for coking and thermal coal are rebounding. Gold prices are expected to rise again soon, and the caution towards growing copper supply looks set to ease slightly.
The fundraising drought appears to be lifting too. Sectors such as gold and lithium have seen a strong improvement in fund raising success this year. And, even more encouraging, investor interest seems to have filtered more broadly to other commodities.
It’s a massive relief in a sector that has long been starved of capital for exploration and development.
However, it’s fair to say that while capital has started to flow again, we're seeing more of a trickle than a flood. Competition for funding remains fierce, with over half our JUMEX respondents anticipating a need to raise funds within the next six months.
Investors are also very selective. Our research confirms that they are strongly focused on minimising risk and have a clear preference for advanced stage assets. It’s a bit of a catch-22 – given that many junior miners haven't made progress on projects and asset portfolios because they’ve been unable to access funding.
With this in mind, if you have existing assets based on attractive commodities – with no significant negative factors – I suggest that you focus on those. You should be realistic about valuations, raise funding quickly and fast track development to deliver the best shareholder outcomes.
On the other hand, if you are looking for new projects, focus on mainstream commodities and quality jurisdictions. If you minimise risk now, you'll maximise your future funding options.
And for junior miners in general, make sure you set the expectations of investors as funding becomes available. This will make sure they understand what the funding will achieve and the management focus on delivering it. It should also help your management team re-establish credibility and trust in the wake of the funding drought.
One way forward is to remember the hard-earned lessons of the downturn – when producers focused aggressively on costs and efficiencies. It forced explorers and developers to be creative; and it encouraged innovation.
Junior miners mustn’t lose this discipline as funding pressures ease. Far better to use it to gain competitive advantage instead.
So keep your focus. Be creative. Build sustainable returns and a portfolio of projects that offers attractive gains – despite the inevitable short term commodity fluctuations.
And continue your drive towards growth in shareholder value.
The 2016 JUMEX survey is available here from our Grant Thornton Australia website.
