Canada’s junior miners are in “survival mode”: Vancouver Sun

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The Vancouver Sun, British Columbia’s most influential daily newspaper, is reporting Canada’s junior mining sector is in “survival mode” as falling metals prices, rising production costs and a lack of financing is threatening the future of many of the province’s 800 junior mining companies.

Among the junior mining companies based in Vancouver is Augusta Resource Corporation. Augusta’s subsidiary, Rosemont Copper Company, is seeking state and federal permits to construct the mile-wide, half-mile deep Rosemont open-pit copper mine in the Santa Rita Mountains on the Coronado National Forest southeast of Tucson.

“Too few (junior mining companies) are in expansion mode and too many are in contraction mode now,” Mercator Minerals president Bruce McLeod said during a panel discussion according to the Sun’s Oct. 17 story. “Given the lack of capital available for junior exploration companies, (the number of firms operating today) is not sustainable.”

The bleak assessment for the junior miners was the focus of the British Columbia Securities Commission’s annual Capital Ideas Conference in Vancouver. The Commission presented a survey conducted by the accounting firm KPMG that interviewed 15 junior mining company executives to get a pulse on the industry as is struggles with a “significant downtown,” according to Resource Investing News.

KPMG representative Paul Levelton acknowledged during the conference the small number of interviews does not provide a representative industry sample, Resource Investing News reports. But he said it does provide a good indication of the general sense of concern that exists among junior mining executives now.

“Much of the funding (raised today) is survival capital — being used to keep the company operational until such times as the market returns,” the KPMG report said.

Augusta Resource’s recent financing efforts indicate it is among the junior mining companies raising “survival capital” to stay in business. With 144 million shares of common stock issued and its price hovering near two-year lows at around $1.88 a share, Augusta is unlikely to seek additional equity financing.

Augusta had $6.4 million cash at the end of June and has been spending about $2.5 million a month on operations. Augusta announced plans in August to issue up to $10 million in convertible debt and sold the first tranche of $2 million in bonds to its chairman, Richard W. Warke, and an unidentified shareholder in September. The company has stated it may sell the remaining $8 million in debt by Oct. 31.

Augusta will need an additional $29 million since it won’t receive a key approval from the Coronado National Forest by the end of the third quarter, according to Augusta’s 2nd Quarter financial reports. The Forest Service approval, known as a Record of Decision, will not be issued until at least March 2014 under new Forest Service regulations that took effect last month.

The KPMG report noted that junior mining companies often depend on purchase by senior mining companies to move a mineral prospect into development and production phases. But many senior mining companies are burdened with “toxic assets”, declining metals prices, lower stock prices and the requirement to restructure their balance sheets before investing in new projects.

“There was some sentiment amongst the Juniors that until the Seniors show consecutive quarters of profits without further write-downs of “toxic” assets on their balance sheets, junior mining company projects will not be of interest to the Seniors,” the report stated. “Until stock prices rise and investment returns to the Seniors, Juniors will continue to have a problem raising money.”

Junior mining companies are having difficulty raising investment capital compared to other sectors because of the high risk and long term required to earn a return on investment, if any, the report noted.

The report said the junior mining sector has been damaged by a “consistent streak of negative media coverage about the mining sector, such as out-of-control mining projects (cost and schedule overruns), public/government acceptance of mining projects, and overvalued, over-estimated mineral deposits.”

Augusta is facing rising costs for the proposed Rosemont mine. The projected cost of the Rosemont project has increased from $890 million in 2009 to $1.2 billion as of July 2012.

The company is also facing strong political resistance from southern Arizona county and city governments as well as two U.S. Congressmen who have voiced their opposition to the project. The U.S. Environmental Protection Agency has also repeatedly stated (here, and here) the mine project poses an unacceptable risk to sensitive water ways in southern Arizona.

The study stated almost all participants indicated they have noticed inconsistent review and enforcement of regulations by the BCSC.

“They felt the BCSC should…focus on enforcing regulations to protect the interests of the public by focusing on what was perceived as ‘questionable media releases and feasibility studies,’” the report stated.

The BCSC took no action against Augusta after it was informed that Augusta failed to report the personal bankruptcy of Augusta Chairman Richard Warke in numerous corporate filings in the early and mid 2000s.

Nor did the Commission take action when Augusta failed to report in regulatory filings that Warke and another former Augusta board member, Donald Clarke, had served on publicly-traded companies that had filed for bankruptcy protection, been delisted from stock exchanges or been subject to cease trade orders.

Augusta has also issued a series of misleading press releases in connection with the Rosemont project that have been documented in Rosemontminetruth.com including:

  • Issuing conflicting statements to regulators and investors concerning the status of engineering for the proposed mine.
  • Falsely claiming annual production of 240 million pounds of copper concentrate will reduce the U.S. dependence on foreign copper when Augusta intends to export all the copper.
  • Claiming the mine will produce more than 9,000 jobs in the U.S. when, in fact, the mine will directly employ about 450 workers.
  • Publicly stating the company has no plans to mine other claims on the top and western slope of the Santa Rita Mountains when regulatory filings state that those claims could be developed.
  • Stating in regulatory filings that the U.S. Environmental Protection Agency has only an advisory role in the permitting process when EPA has veto power over an essential Clean Water Act permit under jurisdiction of the U.S. Army Corps of Engineers.

Augusta’s financial outlook is heavily dependent on short term loans and quick approval of permits for the Rosemont project.

Augusta has borrowed $83 million from RK Mine Finance Trust (Red Kite) since 2010. The loan and more than $10.7 million in interest as of December 2012 is due in July. Augusta has pledged all its assets of Rosemont Copper as collateral for the Red Kite loan.

HudBay Minerals controls nearly 16 percent of Augusta’s common stock. The Toronto-based mid-sized miner appears to have gone from a friendly investor when it first acquired Augusta shares in a private placement in 2010 to feared predator this year. Augusta has adopted a “shareholder’s rights”, also known as a poison pill, to fend off a potential hostile takeover.

Augusta entered into a joint venture agreement with United Copper & Moly, LLC, a Korea-based company that includes LG Corporation, the giant consumer electronics firm, and Kores, the Korean government’s mining exploration arm. United Copper has invested $70 million in the project and is due to invest another $106 million if, and when, Augusta obtains all the major permits needed to begin construction.

Augusta also has an agreement with Silver Wheaton for $230 million investment in exchange of the sale of all the silver and gold produced at the mine at a set price. But like the remaining $106 million from United Copper’s pledged investment, Silver Wheaton’s funding is tied to receiving all major permits.

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One Response to Canada’s junior miners are in “survival mode”: Vancouver Sun

  1. ALAN JOHNSON says:

    JUNIOR MINERAL RESOURCE COMPANIES , OF WHICH CANADA HAS AN OVERABUNDANCE , ARE FACING HARD TIMES AS THEY STRUGGLE TO SURVIVE . THOSE WITHOUT PRODUCING MINES LACK CASH FLOW AND OFTEN CREDIBILITY . AUGUSTA WOULD FIT NICELY INTO THIS GROUP . THEY HAVE EFFECTIVELY MORTGAGED THEIR ROSEMONT PROPERTY IN ORDER TO SECURE FINANCIAL SUPPORT . THEY HAVE NO COLLATERAL TO PUT UP IN ORDER TO SECURE THE MAJOR FINANCING REQUIRED TO BRING THE ROSEMONT PROPERTY INTO PRODUCTION . EVEN IF ALL PERMITTING WAS IN PLACE , LEGAL CHALLENGES COULD AND PROBABLY WILL CONTINUE AND THIS WOULD PROVE TO ENCUMBER ANY ATTEMPT TO DEVELOP A MINE . ALSO , ANYONE CONSIDERING A TAKEOVER OF AUGUSTA AND THE ROSEMONT PROPERTY WOULD SEE THIS AS A MAJOR OBSTACLE AND SIMPLY GO ELSEWHERE IN THEIR QUEST . AS AN EXAMPLE , CAPSTONE MINING IS CURRENTLY LOOKING FOR ACQUISITIONS AND MAY BE CONSIDERING THE MERCATOR MINE NEAR MINERAL PARK IN NORTHWESTERN ARIZONA . ONE SIMPLE REASON IS THAT MERCATOR IS FULLY PERMITTED AND OPERATIONAL . HOWEVER , ITS FINANCIAL SITUATION IS WEAK AND CAPSTONE HAS CASH AVAILABLE FOR INVESTMENT .

    CANADA’S JUNIOR RESOURCE COMPANIES OPERATE WORLDWIDE AND ARE DRIVEN BY THE STOCKMARKET . IN CANADA , MANY OF THEM SURVIVE ON GENEROUS ” FLOW THROUGH ” CAPITAL . THE COMPANIES RANGE FROM ” POST BOX ” SIZE TO VERY SUMPTUOUS AUGUSTA SIZE . PROSPECTUSES ARE THE ORDER OF THE DAY AND TEND TO CONTAIN MIND BOGGLING DESCRIPTIONS OF PROPERTIES IN THE MOST EXOTIC PARTS OF THE WORLD .
    THIS HAS ALL BECOME A PART OF THE CANADIAN CULTURE AS IT APPLIES TO MINERAL RESOURCE DEVELOPMENT . THE CASES OF ABUSE ARE WELL DOCUMENTED IN MANY CASES BUT FEW , IF ANY , JUNIOR MINING COMPANIES HAVE BEEN FOUND GUILTY AS CHARGED . THE CANADIAN SECURITIES AUTHORITIES RARELY TRAVEL , IF EVER , OUTSIDE OF CANADA TO INVESTIGATED SUSPICIOUS DEALINGS BEING CARRIED OUT BY A CANADIAN REGISTERED COMPANY .

    MINERAL RESOURCE COMPANIES WHO FIND THEMSELVES IN ” SURVIVAL MODE ” WILL STOP AT NOTHING IN ORDER TO STAY AFLOAT .