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2015: The year in junior mining

Published: 09:23 29 Dec 2015 EST

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Mines but no money

The year closed with the first US interest rate rise since 2006.

When you think about it with rates held down that low for that long, it’s no wonder the commodity boom took a while to die after the financial crisis hit in 2007.

There are mixed reviews about how prepared the Fed was during Alan Greenspan’s time, but since the Lehman Brothers collapse it’s done its job pretty well.

It’s held its nerve, it’s signalled its intentions clearly, and it’s made its move only when it thinks the time is right.

But what does it all mean for the junior miners that were running so rampant on the market in the years running up to the financial crisis and, in many cases, in the years afterwards?

Well, if the commentary at this year’s Mines & Money was anything to go by, capitulation is now upon us.

This was the first Mines & Money for a few years at which pundits didn’t try to call the bottom but predicted instead that things could still get worse.

Why?

Two reasons: the first because things still might get worse, but second, and more importantly, because things are already now so bad that it doesn’t serve anybody’s interest to pretend otherwise.

As the bleak times set in, in 2011, 2012, 2013 and 2014, there was still enough of the old momentum, enough of the old demand from China, and enough of a residual high from the Fed’s rate freeze to keep things going.

Funding sources did gradually choke up, but only over time, and at the end of 2014 it was still worth pretending things were just about to get better in order to get that last bit of equity finance over the line and to squeeze that last bit of positive sentiment out of battered investors in order to get valuations up.

One year on, and that’s no longer worth doing. There was only one financing of any real significance announced to coincide with Mines & Money this year, that of Lydian International (TSX:LYD).

Star speakers were thinner on the ground. Numbers were down. No-one was disappointed though, because no-one expected it to be good.

But we are now in an environment where the iron ore price is lower than at any time since the price setting cartel broke up at the height of the boom; where the gold price seems to be edging inexorably towards the US$1,000 mark; where copper, nickel and zinc are all trading in the doldrums; and where the US dollar, the currency all these commodities are priced in, is only set to get stronger.

What’s more, there’s no money left in the pot. All the game investors lost their shirts long ago.

For directors and shareholders who cashed out in the boom’s mega deals, like Uramin’s sale to Areva (EPA:AREVA) or Goldcorp’s (TSX:G) US$3.4bn purchase of Andean, there was, it’s true, a happy ending.

Unless, that is, most of them, as professional mining investors, piled significant portions of their winnings back into the markets on the hunt for the next deal.

On a smaller scale, for example, those who successfully backed Kiwara when it sold out First Quantum (LON:FQM) in 2009 for US$260mln have done less well backing the same management team elsewhere.

And those who do have cash like, for example, the good people at Chalice Gold (ASX:CHN), who timed their boom-time exit from Eritrean assets to perfection, are holding on to it.

With valuations still dropping, why would you spend now unless the case for uplift was absolutely irrefutable?

But that’s a situation that leaves the smaller companies marooned. No one wants to put up equity finance because the expectation, very reasonably in the light of recent history, is that valuations are likely to drop still further.

But without equity finance it’s almost impossible to add any value.

Hence we have a market that’s stalled, a Mines & Money where nothing happened and no-one was disappointed, and everyone is waiting for something to happen.

And something has happened now – the Fed has raised rates. That this didn’t lead to a more marked decline in the market just goes to show how deeply ingrained the gloom already is.

No matter that demand from China once again seems to be picking up. No matter that the overall world economy remains in growth; commodities are in oversupply, prices are low, and investors are not interested in risking hard cash in a sector which hasn’t delivered any sort of reward for a number of years now.

That was the world that miners finally started getting used to in 2015. Whether 2016 will be any kinder remains open to question.

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