MinEx

Nursing juniors Australians beat Canadians

Maybe it’s an Australian knack for stomaching awful things. Vegemite. Bloodied juniors.

Richard Schodde, Managing Director of MinEx, a small but powerful mining research firm out of Australia, always has some interesting slides in his presentations. In one of his latest he drew a picture of the diverging fate of two patients: ASX and TSX/TSXV exploration juniors.

Australia and Canada have long dominated global exploration (though China is rising.) But the Australians – nursing deep wounds to be sure – are still faring much better than Canadians.

The comparison drew Schodde, on the road in New York, into a 30-minute talk on Friday morning before his hotel’s house-keeping kicked him out of his room.

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The basics
Proportionally-speaking, Australian exploration juniors have healthier (albeit still very stressed) cash reserves than Canadians.

That the juniors are in an abysmal state, cash-wise, will come as no surprise to anyone following the sector. But the yawning gap between ASX and TSX/TSXV juniors may.

As of mid-2014, the Australians have a fair amount more cash than Canadian outfits and equally or perhaps more critically, haven’t sunk (yet?) to as near embarrassing marketcap depths.

Consider the cash. Just over half of ASX junior exploration companies have under A$1 million (which is roughly equivalent to the same in Canadian dollars). It’s nearly three quarters of the those on the TSX/TSXV. More daunting: only one in five ASX junior explorers have less than A$200 000 – hardly an amount of money you can do anything fruitful with.

But half the TSX/TSXV juniors are below A$200 000 in cash reserves.

This is an awful state of affairs. It reflects a low in cash reserves not seen since after the Bre-X scandal in the late 1990s that decimated the junior exploration sector (using Schodde’s calculations in constant 2013 dollars). In fact it’s slightly worse.

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In the meantime, there are stinging number of juniors in Canada with marketcaps under A$1 million – a level that makes it near useless to raise cash, at least for the purposes of doing something useful like discovering deposits. A quarter of TSX/TSXV junior explorers are under that mark. It’s just one in twenty for their Australian mates.

This gloom and doom stuff is well trafficked material by now and it may be sooner rather than later before it reverses course. As an aside, Schodde thinks the sector is bottoming and will begin to climb back in about 12-months time.

A topic for another day.

Why the difference?
But the question at hand is: Why are the Australians doing so much better than Canadian explorers?

Maybe it is in part a simple matter of timing. Schodde wonders if Australian companies have suffered less, or later, in the current mining sector downturn. It doesn’t hurt, for example, to be as near to China as the Aussies are, where most of the world’s metal demand growth has emanated.

Psychology, too, may play a role.

“Another subtle point,” Schodde says. “The psychology between the two exchanges is different: In Australia, people are quite comfortably trading shares that are worth pennies. But in Canada the companies hate to be in that position and they often go for a stock consolidation to get their numbers back to something that looks legitimate.”

“Now the Australian companies are quite relaxed having shareprices that are one or two cents or even less.”

Canadians are frozen. The Australians have more guts – with what may be a slightly more forgiving market to boot – to blow their equity structure to levels considered impolite in Toronto (where you roll back, hope valuation sticks, and flog more shares, right?)

Billions of shares outstanding is not surprising in Australia. It is in Canada.

“In Canada the juniors keep pretty tight control over their share register,” Schodde says. “As a result they are more reluctant to raise funds especially during times of low shareprices, which is exactly where we are. I expect that has something to do with why the Australian junior sector is surviving a little bit better.”

It could also be related to survival costs. Schodde estimates that it is cheaper to stay alive (i.e. not discovering anything) as an exploration company in Canada than in Australia. He says, anectdotally at least, you could hang on for just under A$100 000 a year in Canada, whereas in Australia it takes north of A$200 000.

Of course spending this little for an explorer is not a winning-strategy (beyond a few years) if you have properties – where there is invariably a state requirement to spend exploration dollars to hold ground. This is an important balancing act by government to keep exploration fresh. You snooze, you lose.

“You can only do that deep sleep for a couple years,” Schodde notes.

For some, that deep sleep cycle is near a point where, lacking life support, the lungs and heart give out.

Still, Schodde thinks the vast majority will live. And looking at the arc of the past decade, he thinks juniors can make a very good – if highly risky – bet.

More on that in a forthcoming post.