How to fix the mining capital and staff shortage with the same response

Man standing as the sun sets

Both the capital shortage affecting the small end of the mining industry and a looming skills shortage could potentially be solved by the same action.

It won’t happen, of course.

Or perhaps it’s happening already?

Let’s dare to dream.

What am I talking about? Before I explain, let me refer you to a recent article in the Australian Financial Review. Here’s the relevant extract:

Insolvencies tipped to rise in shrinking junior mining ranks

Australia’s junior mining ranks have shrunk to the lowest level in four years and accounting firm BDO believes insolvencies are likely to rise on the back of a two-year high in the number of companies close to exhausting their cash reserves.

The pain is extending to landlords, restaurants and airlines, with analysis finding the junior resources sector spent about 22 per cent less on “administration costs” in the first half of 2019, compared to the same period of 2018.

The ASX requires explorers to file a quarterly cash-flow statement, an “Appendix 5B”, and BDO said 666 companies lodged one in the three months to June 30. That was down from 680 in the first three months of the year and more than 700 a year ago, and was the lowest number since BDO started tracking Appendix 5B’s in 2015.

While a range of factors played into the decline, BDO noted the sector saw ten companies delisted and three suspended during the period. Two further junior resources companies were acquired by companies with no connection to the resources sector, and the change of business model means they will no longer need to publish an Appendix 5B every three months.

The average cash balance held by Australian exploration companies declined from $5.62 million to $5.39 million in the three months to June 30. The number of companies with less than $1 million of cash on hand rose to the highest level since 2017, with 41 per cent of companies in such dire straits. In June 2018 that proportion stood at 31 per cent.

Now, I don’t run a small exploration or mining company today, but I have done in the past, and today dozens of them are our clients. I also invest in them (well, that’s too strong a word – I speculate) so I am super interested in this subject.

And the question I would ask is: how many of those 666 companies have a project that has better than a one-in-100 chance of ever becoming an operating mine in, say, the next 10 years?

Probably, very, very (did I say very?) few.

I’ve previously written on a similar topic: Beware the market miners

What do the experts think?

To ensure I wasn’t completely off my tree here, or overreaching my station in life, I asked an expert in these matters for his take.

Liam Twigger is Managing Director of PCF Capital Group, a company that specialises in providing corporate advice to the resources sector.

“The current market trading conditions for juniors are the toughest I’ve seen in over 25 years and represent an ongoing capital strike for the sector,” Twigger said.

“Additionally, unseen to many, is that the massive global growth and success of passive index tracking ETFs (in Australia, up from $86 million to $56 billion since 2001) has killed off many of the active fund managers who historically would get behind good junior stories.

“As such, it’s only exceptional assets and management teams that can get market support, and I think this will be the case for the next few years.”

Fascinating observations.

Now, I want you to imagine something

So, back to my solution to both the capital and skills shortages.

What if all the best projects out there were held in just 333 companies, not the 666? How much easier would it be for investors to assess company values and therefore make positive investment decisions?

It would also mean there would probably be several hundred extra board members, CEOs, company secretaries, exploration managers and various other skilled senior operators available for the current raft of projects being explored, assessed, promoted, financed, developed or built.

Relief (for either issue) won’t come in this manner, of course, because even if it did, the entrepreneurial spirit would kick in and the market would soon have its population of zombie companies replenished.

There is an alternative, of course

Alternatively, what if investors got smarter and refused to hand over their money? Perhaps that’s what’s happening?

From where I sit, that would be a positive outcome for all of us who play some role in trying to find, finance, build and staff mining projects.

What do you think?

Steve Heather