BCSC Commissioned Report Provides Cold Comfort for Junior Miners and Investors 

publication 

November 2013

Securities Bulletin

On October 17, 2013, the British Columbia Securities Commission (the BCSC) released a report prepared by KPMG entitled "B.C. Junior Mining at a Crossroads: Executive Management's Perspective" (the Report). The BCSC commissioned the Report in connection with its annual Capital Ideas conference to obtain a better understanding of (i) the downturn in B.C.'s junior mining sector, and (ii) the factors that have impacted the availability of financing for junior mining companies (Juniors) engaged in financing activities in B.C.

The Report is based on interviews with senior executives from 15 British Columbian Juniors, largely in exploration phases across a variety of mineral sectors, including gold, copper, uranium, silver and other base metals.

In short, the participants were of the opinion that most of the root causes that have led to the current state of financing for Juniors were due to the cyclical nature of the mining industry and current economic and market conditions. The general comforting (or discomforting) message from the participants is to "wait it out – the market will come back", with words of caution that the next one to two years will likely continue to be challenging for Juniors seeking financing.

All participants indicated that current market conditions are not favourable for attracting retail and institutional investment in Juniors. With higher costs for structuring financing deals and significantly lower stock prices, the cost-effectiveness of public financing has diminished. As such, Juniors are limiting the number of times they go to market for funds, favouring operational streamlining and/or seeking alternate sources of funding to sustain company operations. Juniors that were successful in raising funds indicated that much of the funding is being used as "survival capital" to keep the company operational.

The views of the participants were generally confirmed by PricewaterhouseCoopers's (PWC) annual report on Juniors entitled "Survival Mode Continued: Junior Mine 2013", which was released on November 4, 2013. That report, which tracked the performance of the top 100 Juniors listed on the TSX Venture Exchange, found that market capitalization, expenditures and cash and short term investments fell 44%, 15%, and 37%, respectively, in 2013 compared 2012, with the 44% slide in market capitalization coming on the back of a 43% decline in 2012. As voiced by the participants, the PWC report found that the largest drops in capital expenditures came from Junior explorers, who saw a 28% cut, followed by Junior producers with a 25% cut.

With clear signs of a struggling sector, participants of the Report noted that Juniors will have to find innovative ways to sustain day-to-day operations and expect private placement and non-public offerings to be the major sources of financing for Juniors until the market returns.

General economic conditions were typically identified by participants as the major contributing factor to the current condition of the industry and it was noted that much of this issue related to fear. As aptly voiced by one participant, "fear and greed drive the markets, and fear is currently in control." Other contributing factors identified included the downturn in metal prices, slow global economic growth, global financial issues, general lack of interest by investors in Juniors, the need for senior mining companies to rid their balance sheets of "toxic assets" and regain control over existing projects, and an older, more risk-adverse investor demographic.

Some participants also noted regulatory issues as a contributing factor, highlighting current regulatory requirements as too onerous and costly for Juniors to comply with. However, all participants generally agreed that even if the regulatory issues were addressed, it would not improve the ability of Juniors to raise capital in today's market.

Participants also discussed the role of the provincial government in the ability of Juniors to recover. Most of the participants noted that the provincial government's commitment to expansion and strengthening of the B.C. mining industry has been positive but that further support, particularly focused support for exploration activities and relations with First Nations, would benefit mineral exploration activity in the province.

Looking ahead, participants generally agreed that there will be an exodus of mining companies and exploration endeavours in the next one to two years. Although this may be viewed as healthy for the industry, it is perhaps not the message retail shareholders of existing Juniors want to hear. In the long term, the remaining companies are expected to regain momentum and rebuild investor confidence by cleaning up their balance sheets. Unfortunately, some participants believe that the longer the delay in the recovery of the mining sector in British Columbia, the more damage will be done to Vancouver's reputation as a mining centre of excellence with the loss of geologists, independent brokers, accountants and (dare we say it) lawyers associated with the industry. 



* Law Corporation

A cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2013