A quick look at the junior resource sector over the last year has seen many share prices under intense pressure, particularly those companies still in pre-production desperately hanging on to their dwindling cash piles. The ASX Small Cap resources Index, ended 2013 down 43% year on year and the Spot gold price declined 27.3% in US$ terms.
Companies have been desperately cutting costs where they can as proven by the abundance of ‘For Lease’ signs throughout West Perth and anecdotal comments suggest that labour and equipment are readily available at discounts of anywhere up to 20-30% of last year’s highs. All this against a background of a consistently strong A$ and weaker commodity prices – So where to from here and are we at the bottom of the sell off for the junior explorers?
Rick Rule of Sprott Asset Management, a leading resources asset manager with over $8.5bn under management, thinks we have further to go until the last remaining stale bulls raise the white flag and capitulate. However he thinks the end is close citing the middle of 2014 as being the potential nadir. According to Rule, what is needed is the disappearance of 500-700 junior resource companies from the leading global stock markets due to their projects, he believes, being uneconomic at current commodity prices making their equity effectively worthless.
If these companies delisted or reinvented themselves – as we are beginning to see for example with the acquisition of PRM Cloud Solutions by Minerals Corporation, it would allow investors to support those remaining quoted companies with viable projects that have a realistic chance of making it into production. Mr. Rule himself says that the canny buyers have already been buying up the good quality gold plays ahead of this final shake out, believing share prices will turn quickly once the bottom has been reached.
So as a junior resources company, what can you do from a communication perspective to avoid the bear-traps and not be one of the potential 500-700 companies referred to above?
Citadel-MAGNUS have developed a headline check list for companies to follow:
1) Corporate Communication:
- Having defined your strategy, ensure it is consistent and coherent; all communication with the market and your stakeholders should reinforce your underlying strategy and how you will achieve your goals and ultimately create value for shareholders.
- Be proactive not reactive. It does not have to be set in stone but give your investors an idea of what they can expect going forward. If the strategy is to sit on the cash pile and cease all exploration and development activity until the market “recovers” you may well find that your investors have moved on to another company with a perceived greater growth opportunity.
- Keep the market well informed of all company developments via ASX releases or non-price sensitive news releases to the website. Twitter and social media are being used ever more widely but be aware of ASX guidelines on disclosure.
- Listen to feedback from your investors and where appropriate act accordingly. Encourage your shareholders to become more engaged with the company which will keep them on the register for longer and more understanding in times of difficult markets.
- Meet regularly with your institutional and major investors. Be aware of their investment criteria and parameters; for instance if you need to raise equity, will they be able to stand their corner?
- If you need to raise further funds, plan well in advance. Ensure there is a defined use of funds for investors to understand why you are raising equity and how much you need. There is usually a small window of opportunity and companies need to be ready to take advantage of it.
- Increase liquidity in your shares. This will help to encourage new buyers on to your register. It can be enhanced by maintaining a strong public profile both in the media and the investment community – both on the buy side and sell side. Present regularly to retail broking desks. The retail market is very important and will be the driver for the share price in the short term.
- Directors’ interests should be aligned with shareholders. Options are important but shareholders feel a much stronger sense of allegiance if they see the management team actually buying shares in the market.
- There are many initiatives management can undertake to reduce costs including cutting back on exploration expenditure, suspending or cancelling marginal projects and/or selling loss making operations.
- Investors expect to see management report ‘all-in sustaining cash costs’. Explain where there is potential scope for improvement to mine plans and what steps are being taken to maximise efficiencies as well as reducing costs.
- Consolidation of the junior resources sector as well as disposals of non-core assets from the majors will be an increasing theme in the near term – indeed there have already been many notable transactions in 2014. Look around at the peer group – is there an opportunity to pick up cheap assets using your shares as currency. Momentum is often self fulfilling and investors want to back those companies that are being proactive and creating value. Better to be the hunter than the hunted.
- However, if you do find yourself as the target of a bid, you need to consider what is in the best interests of your shareholders and extracting the most value for shareholders. Communication to all stakeholders at this time will be critically important and you need to have a Takeover defence plan in place.
Initial analyst expectations forecast a flat or slightly declining underlying US$ gold price for 2014 before recovering in 2015, although local companies will be supported by the expected softening of the A$. Those that do come through the recent malaise will be stronger and better positioned for the eventual recovery in the gold price, hopefully leading to substantial returns for those canny buyers.