Are we back to the days of geologists and internet start-ups?

GAVIN WENDT: There’s an interesting comparison at present between the malaise within the resource sector and high-flying components within the industrial sector.

This is particularly noticeable in the IPO space. There are just three resources IPOs amongst the list of 27 upcoming floats currently on the ASX website.

The ‘tech’ sector has seemingly attracted a lot of the speculative money that would naturally find a home in the resource sector – and the stag profits that these opportunities have generated for speculators means things aren’t likely to change any time soon (until the fad runs out of steam).

Of course, anyone who’s been around the resource sector a while has seen this all before.

I clearly recall the ‘dot-com boom’ during the period from 1995 – 2000, where seemingly every second junior exploration company elected to reinvent itself as an IT play as a crude, short-term means of survival.

One of the most dismal pictures I’ve ever had to witness was that of life-long mining and exploration industry veterans with decades’ worth of experience, walking into my broking office to try and explain their dot-com start-up business, with no concept of how they were ever going to be successful, attract sales or generate earnings.

To make matters worse, they couldn’t even get their laptops to work!

All that happened was that a bunch of brokers and pimply-faced vendor computer geeks got rich (mostly on paper) for a while, until the whole house of cards (inevitably) collapsed.

And given the situation we’re seeing now in the tech space, it’s almost a certainty that we’re witnessing the beginnings of the next tech debacle.

Investors (or more accurately ‘punters’) are happy to back the latest high-priced offerings, without any real clarity around how earnings will be generated. Just like the 1990s all over again.

The upside out of all this however is that it demonstrates clearly that there is speculative and risk capital returning to the market – and over time it should start to find its way into the resources sector once more.

One of the biggest problems facing the resources sector is the massive oversupply of listed entities.

We certainly don’t need +900 listed resource companies on the ASX, as the quality of project and management simply isn’t there.

All that’s happening is that the better quality companies are trying very hard to differentiate themselves from the hundreds of penny dreadful that have no real projects and are most likely saddled with management and boards that are more interested in a ‘lifestyle’ than anything else.

To be brutally honest, there are probably 400 to 500 too-many listed resource companies at the present time – and these companies should either merge or disappear – for the sake of investors and the sector.

The average cost of maintaining an average exploration company is probably around $1 million annually, so there is a vast swathe of shareholder funds that are simply being wasted just keeping the lights on.

What’s frustrating from my perspective is the lack of corporate (merger) activity amongst the hundreds of penny dreadful, including a lack of introduction of new project opportunities.

In many instances these resource ‘shells’ believe they are worth a hell of a lot more than they actually are.

Many of these junior companies have cut back on virtually all exploration activity as a strategy of ‘conserving shareholder funds,’ which really isn’t a strategy at all. A company that’s maintaining an office but no tangible exploration activity is giving its shareholders no rational reason to hold their stock.

What the junior sector needs is a wholesale cleanout, by way of mergers, de-listings, insolvencies and backdoor listings.

Whilst things aren’t necessarily going to get better any time soon, those of us that have been around the sector for a while (and have a bit of grey hair) know that this is a process that the resource sector regularly goes through and will ultimately lead to a better performing industry.

As we’ve said previously, the one certainty about the resource cycle is that it repeats itself.

Production falls, new projects are delayed, and the exploration pipeline of potential new projects is cut to a minimum.

Global growth then starts to recover (which is what we’re witnessing now), with better indications out of China, the US and Europe.

The net result will inevitably be that shortages of some metals and minerals will start to occur, prices will be driven upwards once again, and funds will start to become available for new mine development.

The downsized miners will be leaner and more efficient exploration will start to pick up again – all preparing the way for another cyclical peak some years ahead.

Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report