A bitter sweet future for junior mining - CNBC Africa

A bitter sweet future for junior mining

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The Bakubung Platinum Mine is Wesizwe's flagship project, located in the North West province of South Africa.

 PHOTO: Wesizwe

Uncertainty in mining legislation and talk of mine nationalisation has painted a dark picture for the country's junior and major miners., miners have now begun taking a more cautious approach to exploration and development projects as negative sentiment begins to weigh down on the industry.

“We pay very careful attention to what is going on because we’re part of this sector and part of the family. We’re obviously keeping an eye on the sector and we contribute where we can,” Wesizwe Platinum CEO Paul Smith told CNBC Africa.

The industry uncertainty has reportedly hit junior miners harder than larger miners, especially as access to funding is more of a major constraint for junior miners.

Junior miners can however gain access to funding, but have to often rigorously prove the effectiveness of their exploration activities, as well as robust opportunities for investors.

According to Grant Thornton’s 2013 International Mining Report, 55 per cent of junior miners that were surveyed rated access to funding as a major constraint.

In the past, the public investment community was the main source of funding for junior miners. Their funds would allow miners to make more explorations and develop assets.

Today, funding is only given to projects that are close to production, pressurising junior miners in South Africa and the rest of the world to tighten belts on any cost that could dent their current funds.

“I think there's been a big re-evaluation of the junior miners over the past two years. We haven't been making investments because we've just been seeing a declining market almost virtually every single stock exchange,” said Neil Gardyne, CEO of New Africa Mining Fund.

Junior miners are however finding alternative means to access funding, one of which being mergers and acquisitions. According to the report, 32 per cent of junior miners viewed mergers and acquisitions as an industry driver in their field.

Governmental involvement and tight mining regulation could however have a detrimental effect on the industry, forcing all miners to review their methods of running and managing their businesses.

"We would have to manage very carefully. That's why we're taking a very measured approach. One can never time these things, but we remain positive,” said Smith.

Wesizwe Platinum will only go into production in 2018, but are nonetheless affected by the current climate in the industry. Other junior miners that are yet to start production could also take a knock from the current uncertainties in the industry.

In 2012, South Africa’s gold production fell to 167 tonnes, the lowest it’s ever been since 1905. By May this year, major mining companies announced severe job cuts in an effort to cut costs and overproduction in an industry that was severely struggling to make a profit.

The downsizing of larger mining companies could however be a capitalisation advantage for junior miners, as previously skilled labourers become more available.

Smith is nonetheless optimistic that mining in South Africa will take a favourable turn soon.

“We’ve all got to take learning out of this process. When I say all of us, I mean labour, government and producers," he said.

"This is a very cyclical sector. Mining generally is cyclical and people tend to forget that when you have a very long bull run. Historically, platinum did have a very long bull run, so people tended to forget that we are subject to shocks in the sector and process."

DIAMONDS THAT AREN'T FOREVER

South Africa's junior diamond mining sector equally has a number of challenges it needs to overcome if it is to flourish.

"It's not just diamonds, it's probably across all commodities, where a lot of junior companies have come into the sector in the last seven years or so,” said Diamond Corp CEO Paul Loudon.

“They've taken projects that have been looked at previously by other operators, and thought that the reasons that they were rejected previously no longer exist, because this time the boom is different. That's not the case. Mining fundamentals really don't change. At the end of the day you must have robust projects."

Loudon added that in the past five years, large sums of money had been allocated to projects that appeared marginal,  in the hope that diamond prices would continue increasing in order to make the projects in question look economically viable. The boom however took a breather, and prices subsequently came down as a result of it.

"The reality is now setting in because capital markets are basically shut to [junior resource companies],” Loudon explained.

“We [our company] were lucky enough last year. We struggled for 18 months to get financing away for out projects, with extremely robust fundamentals. it was a project that we had been working on for five years."

Companies with the right fundamentals are now fighting for funding and support, and taking a more aggressive approach in order to remain in the industry.

"You have to have your hurdle rates high on any mining project, and especially diamonds. Diamonds face pricing challenges that you don't see in other commodities, but the long term fundamentals for this sector are very strong,” said Loudon.

A FUTURE THAT LIES IN OPTIMISM

While demand plays a key role in the future of South Africa's mining industry, the current amendments to the Mineral and Petroleum Resources Development Amendment Bill will be instrumental in giving the industry a new direction.

Despite the global decline in commodity prices and decline in resource production, the Grant Thornton report illustrates that mining executives are optimistic about the industry's turnaround, with 34% per cent of those surveyed expecting revenue to increase, and only 12 per cent expecting a decrease.

“I think that we're getting to a stage now where the valuations on these things are getting to be more realistic, and so that's why we think it's a good time to start investing [in junior miners]” said Gardyne.

“Junior miners are a great source of finding good projects. Most of the countries in Africa these days have reasonable regulatory environments. [They] went through a process about 10 to 15 years ago where they modified all of their mining laws and they created environments which were more conducive for juniors and majors to come and be successful.”

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