Mining industry veterans eyeing Thursday’s market selloff are forecasting a shakeout at the speculative end of the market as financing for mineral exploration dries up.
“If you are a junior mining company in the exploration world, you will probably have a very difficult time raising money, especially in a volatile market,’’ said Joe Mazumdar, a senior market analyst with Haywood Securities in Vancouver.
Mazumdar said it means investors with an appetite for risk will soon be looking around for cashed-up companies, with projects in low-risk jurisdictions that are already financed and headed by management teams with a proven track record for exploration and development success.
“There is a lot of aversion to risk out there,’’ he said.
One industry veteran agreed with that view. Having experienced all of the exploration game's highs and lows, Silver Quest Resources Ltd. (TSX: V.SQI, Stock Forum) chief executive officer Randy Turner understands how important it is to have money in the bank when markets are in selloff mode.
Fourteen years ago, Turner was working to raise $10 million for a Northwest Territories diamond project that was owned by Winspear Resources Ltd. He managed to close the deal just three days before it was discovered that the Bre-X Minerals gold discovery was really a scam.
It was a move that proved pivotal for Winspear. As financing in the junior end of the market temporarily died up, Winspear was able to use that money to develop its Snap Lake diamond project. Winspear was acquired by De Beers Consolidated Mines in September 2000 in a $305 million deal.
Over a decade later, Turner is running Silver Quest Resources,a Vancouver junior with gold exploration projects in the Canadian Yukon and north central British Columbia.
On September 19, Silver Quest’s joint venture partner New Gold Inc. (TSX: T.NGD, Stock Forum) unveiled an updated NI 43-101 compliant resource estimate for the Davidson property near Vanderhoof, which is thought to host 2.2 million ounces of gold in the drill indicated category.
Since the start of July, Silver Quest has seen its stock price tumble from a high of $1.28 to 85 cents, leaving the junior with a market cap of $92 million, based on 109 million shares outstanding.
But in an interview with Stockhouse, Turner said it is business as usual for Silver Quest, which has about $15 million in cash.
The company already has sufficient cash to fund exploration on the flagship Davidson property through to the middle of next year. And since field programs on the junior's other properties are winding down with the approach of winter, Turner said the company will be largely unaffected by this week’s market gyrations.
Meanwhile, as investors opt for the safety of bonds and dividend paying equities, Haywood’s Mazumdar said he has been taking calls from people who believe that the price of gold will recover from Friday’s record freefall – in which spot bullion fell US$101.70 an ounce to US$1637.70 – and are looking for so- called value plays or companies with good stories to tell.
“You get questions from investors who have a long term view of a certain commodity and are looking basically to bottom pick and get those stocks that are highly valued in an environment where [they think] the gold price is going up,’’ he said.
It is why this week’s selloff can deliver benefits to investors and companies, analyts say.
Investors benefit by having the opportunity to pick up value plays at lower prices. The richer companies have the chance to stake and acquire properties that are made available by companies needing cash to meet their commitments.
Meanwhile, even if precious metal prices recover quickly, Turner thinks it may be a while before investors regain their appetite for excessive risk. “The volatility that is persisting in the market place right now is putting a lot of people on edge,’’ he said.