BDO Global says struggling exploration juniors need new approach to survive COVID-19 disruptions

While the minerals exploration sector has clawed its way through the start of 2020, advisory firm BDO Global believes cracks were showing for some junior operators well before COVID-19 came to stay.

According to industry surveys conducted each quarter by the multinational firm, many explorers at the small cap end of the market have been struggling to stay afloat in recent times and the pandemic has only exacerbated what was already a dire situation for some.

Meanwhile, larger companies, by comparison, continue to raise capital and invest in new opportunities despite the economic landscape.

Speaking with Small Caps, BDO head of global natural resources Sherif Andrawes said the split between small and large caps is more defined than ever.

“[Our survey] analyses the cash that exploration companies have, what they are spending it on and how much they have raised in the quarter, and what we have found recently is that the market is split almost in two and that split is very relevant now,” he said.

“There are companies at the larger end which do quite nicely and have been raising and investing more money than ever, and there are companies at the bottom end of that market – the more junior explorers – who have been doing it a bit tougher and finding life in general a bit harder.”

He anticipates results of the most recent survey will highlight a growing issue for the junior sector.

“What we are expecting in the next quarter is for that split to have grown even larger – those companies at the bottom end which were struggling before COVID-19 are probably struggling even more now, whereas the larger ones are likely to be doing okay,” he said.

Global struggle

Mr Andrawes spends a large chunk of his year visiting juniors across the world and has seen a pattern emerge across the sector since the pandemic took hold.

“Right across the globe, it is the same struggle at that smaller end of the market,” he said.

“Australia is probably in a better position than most [regions] in that we have been hit less by the virus, our companies were stronger to begin with, and the ASX is probably the strongest of all the exchanges at the moment in terms of how much money is being raised.”

“I think for junior explorers, Australia is probably the best place to be right now.”

“That said, the number of exploration companies [in Australia] has reduced from 850 five years ago to 651 at the end of 2019 and I anticipate we will probably continue the trend of losing 10 or 20 companies, maybe more, every quarter from here.”

Reduced spend

Belt tightening has taken a front row seat for many juniors, with staff cutbacks and reduced exploration spend across the board.

“For some time now, the sector has seen a reduction in exploration expenditure with the fear that there would be a price to pay in the future with fewer new discoveries coming online,” Mr Andrawes said.

“When expenditure and activity reduces, it exacerbates that fear and there is no doubt in my mind that there is going to be a dearth of projects in the coming years as a result.”

He believes the mining industry has an obligation to ensure a pipeline of activities and viable projects for when the panic is over.

“That is definitely something that we, as an industry, need to make sure of,” he said.

“If we don’t do something about it now, in 10 years’ time, we will look back and say there was an opportunity missed and that is a message that needs to go out to government and to the larger companies that are still making money and have the funds to invest in some of those juniors to ensure they pull through.”

Money management

For junior companies, money management will be a key to surviving the next few months.

Under new rules announced by the ASX and ASIC this month, companies that have been impacted by COVID-19 and need to urgently raise funds will get temporary relief in the form of “low doc” offers – including rights offers, placements and share purchase plans – to be made to investors, even if they do not meet all the normal requirements.

The low doc capital raising regime is not usually available if a company has been suspended for a total of more than five days in the previous 12 months, and companies in that position would instead need to prepare a prospectus or apply to ASIC for individual relief.

Both of those options can be costly and involve delays.

“The immediate priority [for any junior right now] would be to conserve cash and curb any discretionary expenditure and a prospectus can be costly,” Mr Andrawes said.

“The temporary changes to rules around capital raising will make it easier for companies to raise equity from now until July.”

“It is only a short period, but I think it will be well received and it is a good start by ASIC.”

Strong suite of assets

Mr Andrawes also recommends juniors maintain a strong suite of assets which could potentially catch the eye of a cashed-up major.

He used the example of New Century Resources (ASX: NCZ), which this week announced exploration and mining company IGO Ltd (ASX: IGO) is set to become an 18.4% shareholder by investing up to $27 million via a placement and entitlement offer.

The companies have agreed to a strategic relationship, which will see them collaborate on opportunities within New Century’s existing portfolio of assets.

“If small companies have good projects, they can attract a larger mid-cap company looking to invest,” Mr Andrawes said.

“I think many companies [at this time] will be looking at opportunities to do something quite different – it might not be reverse takeovers anymore as they are a lot harder to do under new ASX rules, but I do think we will see a lot of companies try to reinvent themselves to make it easier going forward.”

“I would expect in the next few months there might be some more merger and acquisition activity with companies coming together to try and find mutual solutions to get through this period.”

Survival mode

With many junior explorers in survival mode, Mr Andrawes said the sector as a whole needs to focus on doing things differently so it can emerge stronger from the COVID-19 disruptions.

“Right now is about survival for a lot of these companies, but the next phase should be about looking at how they can come out of this period more resilient and stronger,” he said.

“Rather than being dependent on one source of cash flow, juniors could diversify their funds by teaming up with a big brother company or re-considering the way they operate by employing more local people and changing their supply lines.”

“I think by later this year and certainly by early 2021, there is no doubt we will see a lot more strength in the markets.”

“The ASX is quite resilient and I am very confident the larger exploration companies will be quite safe and strong.”

“It is the smaller ones that may still struggle somewhat.”

But where there is faith, there is hope.

“One of the great things about Australian exploration companies is that they are a very resilient community,” Mr Andrawes said.

“They always find a way through, even when hardship and adversity is thrown at them.”