A new study by consultants Grant Thornton shows just how rough young mining companies have it in the current economic climate. The conditions brought on by the shift in demand for commodities threaten the existence of these junior mining companies as well as most in the industry.
According to the 250 mining executives surveyed for the report, close to one third of junior miners have to raise additional funds within six months, while just under 60 percent know their companies need to top up cash within a year. What is perhaps the most worrisome is around 10 percent of junior miners are not aware of their companies need more money.
"It is an untenable situation for many mining companies, and one that has plagued the industry since the summer of 2010,” said Jeremy Jagt, mining leader for Grant Thornton Canada.
"We would ideally like to see junior miners holding sufficient funds to support their operations for a year or more. When they don’t, they gradually enter into a capital ‘Catch 22’—weakened to the point where they cannot sustain sufficient operations or keep projects moving to generate cashflow, but also unable to source affordable funding because they’re not producing cashflow and/or moving their projects forward. They struggle to get out of that cycle."
Large companies—listed firms with a market cap of more than $500 million or private companies with 500-plus workers—are feeling the pinch too. Around 35 percent of major miners plan to change their capital structure within the year.
The report also commented on the potential for the number of mergers and acquisitions to increase exponentially. However, for some companies this might not be enough: Grant Thornton predicts one in 10 junior miners are likely to go into administration, while around 15 percent may temporarily halt operations.
Information sourced from Grant Thornton.