Equity financings for gold companies hit four-year low

Halifax-based Metals Economics Group (MEG) published Thursday its Pipeline Activity Index (PAI), which shows equity financing conditions continue to take their toll, as gold companies were able to raise only $445 million through equity placements in May-June—the lowest two-month total since late 2008.

The report warns markets are unlikely to improve significantly in the near term, at least until the European debt crisis is remedied. Thus, it warns companies could be in for a long summer of budget restraint.

The industry’s aggregate market cap plunged to $1.55 trillion in May—its lowest level since early 2010. LSE-listed companies and base metals-focused companies were the hardest hit.

The number of significant drill results for both gold and base metals somewhat surprisingly strengthened in May-June to reach its highest two-month total to date in 2012. The increase in drilling was aided by the onset of the Northern Hemisphere summer, when many Canadian juniors begin new programs. The typical seasonal pattern generally sees drilling activity increase through summer and into early autumn.

While financings remain very difficult for junior explorers, intermediates and midsized juniors with prospective projects have managed to continue advancing their projects. Even in scaled-back programs, cash-conscious companies are focusing on the most prospective targets to ensure that they are well-positioned when market conditions improve. The seasonal trend will likely keep drilling steady for the coming months, but we do not expect it to reach the highs of 2011, due to poor financing conditions and the overall softening of metals prices.

Significant financings ($2 million minimum) for gold and base metals projects in May-June totaled $2.2 billion—a decrease of more than 21% from the previous two-month period. The amount raised for gold decreased 32%. Debt accounted for three of the four largest gold raisings, including $400 million of senior notes issued by Allied Nevada Gold for the expansion of its Hycroft mine in Nevada. The amount raised for base metals was comparable in terms of funds raised to March-April; however, the number of completed financings decreased 23%. More than 53% of the total raised was debt, including $300 million from Vnesheconombank for development of Baikal Mining’s Udokan copper deposit in Russia.

 

The number of initial resource announcements was promising, with 11 announcements in May (seven gold, four base metals) and 16 in June (eight gold, eight base metals).  Aside from an initial estimate of 4 million mt of nickel for URU Metals’s 50%-owned Zebediela nickel sulfide project in South Africa, and four initial gold estimates of more than 1 million oz, many initial estimates are relatively small. Investors’ reactions to the initial estimates have been mixed, with companies that fail to meet expectations often seeing significant declines in their share prices.

The MEG Pipeline Activity Index (PAI) measures the level and direction of overall activity in the supply pipeline, incorporating significant drill results, initial resource announcements, project development milestones, and significant financings into a single comparable index. The PAI is featured in the MEG Industry Monitor—a series of comprehensive graphs and charts, with related commentary, illustrating MEG's analysis of monthly changes and emerging trends in the base and precious metals pipelines. Using information only available from MEG through MineSearch, Exploration Activity Services, and Acquisitions Services, the Industry Monitor tracks developments based on announcements over the past 26 months of significant drill results, initial resources, project development milestones, significant financings, and acquisitions.