way forward for juniors r schodde ausimm 7 july 2009

MinEx Consulting Strategic advice on mineral economics & exploration

The way forward for the Junior Sector in difficult times

A Case of When the Going Gets Tough?

Richard Schodde: MinEx Consulting

AusIMM Technical MeetingMelbourne, 7th July 2009


Overview

• Review how the Australian junior explorers responded to the bust in the late 1990s– Who disappeared and how did it happen?

– Who were the winners and losers?

• Using data from the published reports identify the spending and cash raising patterns of the Juniors over the business cycle. From this make projections on:– Likely future level of spending and where its going

– How many companies are under stress and who might disappear

• Comments on how the industry can rise to the challenge

2


December 1998 versus December 2008

• In December 1998 there were 215 junior mineral explorers listed on the ASX . By December 2008 this had grown to 554 companies

…. But 425 of these are new entrants, with only 154 of the original 215 companies lasting the distance

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Question - What happened to these companies, and what lessons can we learn from them?


In recent years a large number of Junior Explorers have entered the market

-10

0

10

20

30

40

50

Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08

Deletions

New IPOs

4

Number of Additions/Deletions in Quarter

Source: MinEx Consulting based on ASX dataNote: Data excludes IPOs for Producers

Caution No data on Deletions prior to June 1998


The industry has gone through a major boom-bustLevel of exploration in Australia: 1992-2008

5

Total Expenditures (2008 A$M) Total metres drilled (Million)

Source: ABS 8412.0, December 2008Note: Data reported on an annualised basis

1997

2007

Expenditures down 50% from

peak in 1997


But the situation wasn’t as bleak as it first appears

• Of the 215 Junior Explorers that were around in Dec 1998, only 28% of them disappeared

• Of the 61 Junior explorers that disappeared, the main factors were:

46% were taken-over

25% were promoted to Producer status

2% relocated overseas10% went bankrupt

19% turned into Dot-Com companies

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These are what investors want !

Ie 16 out 215 Junior Explorers ultimately became Producers. This gives a conversion rate of 7%


And much of this didn’t happen overnight

• In December 1998 the average age of the junior explorers was 5.6 years. Those that ultimately disappeared, lived on for another 6 years

…. Giving a total average life expectancy of 12 years

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This is comparable the average life expectancy of a dog (8 to 15 years)

Source: ABS 3307.0.55.001, 2008

In 2007 the median period between marriage and divorce in Australia is currently only 12.5 years


Winners and losers in the last downturn

Winners• Those companies who used new approaches to exploration to find the

elephants:

– Minotaur (Prominent Hill), BeMaX (Mineral Sands), Moto (gold in the DRC)

• Those companies who had the vision to take strong positions on big company discards:

– Oxiana (Cu/Au at Sepon) and Indophil (Cu/Au at Tampakan)

• Companies that had the vision to be first into a neglected commodity

– Fortesque (Iron Ore), Paladin (U3O8)

Losers• Dot-Com companies

• Those companies that went to sleep and missed the subsequent boom

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The key challenge facing junior explorers

• Because most junior companies are still at the exploration stage they need to continually raise money to fund their programs

– Lower commodity prices makes it harder to get a project into production or sell the project

– The Global Financial Crisis has made it harder for exploration companies to replenish their funds

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ANALYSISHow did companies survive the last downturn?

• Using data published by the Juniors in their quarterly reports to the ASX it is possible to determine long term trends in the:

– Level of cash available

– Typical rates of expenditure (and where it goes)

– Average life expectancy of a company if no further funding becomes available

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The analysis was used to make observations on how the industry survived the last down turn and develop strategies for companies going-forward


Snapshot of cash position of Australian Junior exploration companies: end-March 2009

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Note: Survey based on random sample of 256 junior explorers listed on the ASXof which 168 were active end-March 2009 out of a total of ~550 companies

A$ Million

Median cash position is $2.10m

(ie half of the companies are above/below this figure)

Source: Derived from Company quarterlyreports lodged with the ASX

Average cash position is $9.1m

Quartile 1Quartile 3


Change in cash position: 1998-2008Sample of Australian Junior Exploration Companies

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A$ Million per company

Note: Survey based on random sample of 256 junior explorers listed on the ASX between December 1998 and March 2009

$2.10m

Even in tough times it is possible

to raise money

$0.62m


Change in expenditures: 1998-2008Sample of Australian Junior Exploration Companies

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A$ Million per company

$1.34m $1.49m

$3.38m

Note: Expenditures are reported on an annualised basis

Company expenditures have been halved in the

last six months

Source: MinEx Consulting


Cash burn rate for Australian Juniors(Years)Annualised cashflow divided by cash reserves

15

Years

0.60

1.14

Median life expectancy remains at 1 year


Without additional funding, a quarter of the industry will go out business within 6 months … but that’s nothing new !!


Sources of Cash by Junior ExplorersBreakdown of total cash income

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Caution: Numbers are based on total cash raised for the entire survey group, and so the overall percentage split by activity is influenced by the actions of the larger companies

Most cash is raised from share issues after the initial IPO


AVERAGE NUMBERS

Breakdown (%)


Uses of Cash by Junior ExplorersBreakdown of total cash expenditures

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Most cash is spent on exploration and

development

Caution: Numbers are based on total cash expenditures for the entire survey group, and so the overall percentage split by activity is influenced by the actions of the larger companies


AVERAGE NUMBERS

Breakdown (%)


One possible industry response

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What bears do in hibernation

“What do directors of speculative companies do during bear markets? It’s rather like asking what Collingwood supporters do during the cricket season or what soldiers do when peace breaks out.

In the case of Blue Sky Mines, the Directors have sensibly contracted the company’s activities so that it has been running purely on administrative costs for the past six months. A shareholder at the Annual Meeting last year described us coarsely as management fee-bludgers and was expelled from the proceedings.”

Source: The Official History of Blue Sky Mines by Trevor Sykes 1996

Pierpont


Where is the money being spent?Expenditures on Exploration + Development versus Administration

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Note: Refers to Median CompanyExpenditures are reported on an annualised basis

$0.91m$0.79m

$2.48m

$0.42m$0.68m

Money into the ground has been sacrificed

Currently half of the Junior’s funds are spent

on admin/overheads

A$ Million pa for the Median Company


Five key tips to Survival1. Work hard on developing a loyal shareholder base

- Frequent communication. Send hard copies of your Annual Report

2. Raise money when you can- But need to pin it to a good story

- Keep the project ideas coming forward

3. Keep head office costs to a minimum- Share costs with like-minded Juniors

4. Incentivise your staff- Reward them well and give stock options

5. When spending money on drilling, make sure it’s well spent by camping out with the drilling crews

- Spend time developing good relations with the local community

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Source: Rob Annells, Executive Chairman of Lakes Oil,as quoted by the Garimpero, Age 13 Oct 2008


SUMMARY – The Industry faces tough times

• The industry is midway through the down cycle

– If the last downturn is any guide, expect expenditures to drop by half from the 2008 peak

• Without fresh funding, a quarter of the industry will close down within 6 months and half of the industry within a year

… but the real story is not that bleak

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But history shows that the Industry is made of tougher stuff

• Junior Explorers have always operated with limited cash reserves and short time horizons

• It has faced similar challenges in the past and survived– However some companies will still fail.

– My guess is at most 20% of the juniors could disappear within 12 months

• The down turn also impact the service providers– Drilling activities and analytical activities may drop by half

– State Government drill funding programs will soften this blow

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Looking forward take advantage of the opportunities

• The current climate creates great opportunities for acquisitions and consolidation

• History shows that great companies are born in adversity

• Need to focus on what’s important - success comes to those with a strong vision to find quality assets. – Now’s the time to hire that “gun” geologist, look in the greenfields for

the next giant deposit, buy the next “Sepon”, or take a key land position in a neglected commodity / country

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CONCLUSIONS

• The key to survival hinges on the Junior’s ability to raise fresh money from its existing shareholders

• To earn the shareholders’ trust, companies need to continue communicating their vision/strategy . Most importantly, companies need to deliver good exploration results

• The risk is that, in the race to conserve cash companies are cutting back on the expenditures in the field. You can’t make discoveries if you don’t drill holes !

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The industry will rise to the challenge !!

way forward for juniors r schodde ausimm 7 july 2009

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