Small Miners Face "Critical" Times as Share Values Drop

New mining projects are set to stall as companies struggle to raise funds, a new report by Ernst & Young has revealed.

In an assessment of the top 20 mining companies listed on the AIM, the value of miners in the third quarter of 2008 dropped by 54%, while the FTSE All Share Mining Index of main market companies fell by 44%, according to the report by Ernst & Young’s Mining Eye, which monitors AIM companies.

Along with fears of a global recession and consequent fall in demand for metals and minerals, junior miners will be unable to find finance to develop their projects into production, the report found.

“The importance of cash and conserving it in such times has never been so evident. It has become a matter of survival in the capital intensive, high risk world of junior mining…” said Ernst & Young’s Director of Mining and Minerals, Dr. Tim Williams.

The lack of funds raised from new issues in the mining sector in the last quarter, has created a “critical” situation for AIM listed miners, according to Dr Williams.

Speaking exclusively to Mining-Technology.com, Dr. Williams said the “small end of the industry will suffer the most.”

“Clearly the R&D component, exploration companies and juniors, are [all] going to find it extremely difficult to raise any more equity finance in the foreseeable future. The market values of many of these small companies reliant on venture capital, has all but collapsed.

“The obvious type of casualty are mining projects on which a previously positive full (or definitive, bankable) feasibility study had been completed and which were now at the stage of raising finance,” he told Mining-Technology.com.

Dr. Williams also said he believes the owners of such projects will find it “extremely difficult” to raise new equity finance by the issue of shares and the only option for small companies may be to sell up.

“They [small companies] must then come up with a workable plan of action as to how to conserve some at least of the value in the business for the future. Many may conclude that a sale of the business to a luckier rival or to a predator may be the only option”, he said.

While established mining countries like Australia and Canada may pull through, developing countries will be hit the hardest.

The economic situation may also benefit the larger mining companies, most of which has an "impressive" capacity to survive. They could even "take advantage of the current situation to get access to mineral deposits cheaply," according to Dr. Williams.

The report also stated that more delistings look likely for the remainder of the year and into 2009.

By Ozge Ibrahim.