THE BOURSE WHISPERER: The latest instalment in the Explorer Quarterly Cash Update series from accounting house BDO continues to paint an unpleasant landscape for the junior exploration sector.
The last few reports from the series have shown a continual decline in the cash position of many ASX-listed mining, oil and gas explorers, which is hardly unsurprising given the sector is struggling to gain any serious traction when it comes to investor support.
BDO bases its reports on the cash position of Australian-listed explorers for each quarter, based on quarterly Appendix 5B reports lodged with the ASX.
The report for the March 2015 has followed recent trends by indicating a further decline in the number of companies reporting 5Bs.
Adding to that concern is a reduction in the number of companies actually exploring, and an overall drop in average exploration expenditure.
“Good news from junior explorers is really hard to find at the moment,” BDO partner Dan Taylor said in the report.
“Almost one in five have ceased meaningful exploration for the time being, and it’s clear that until commodity prices dramatically improve and demand increases, many companies will continue preserving cash in order to survive the next two or three years.”
The report did manage to identify some positives to take away:
Four companies graduated to become producers;
16 companies managed to raise more than $10 million – although this figure is also down from last quarter, albeit by one from 17 with only three contributing from the oil & Gas sector.
The not-so-positives include too many companies without the capital required to continue operating for more than twelve months.
It gets scarier, with more than 40 per cent of ASX-listed junior explorers left with net operating cash reserves to last one or two quarters at their current cash burn rate.
“As the March 2015 update reveals, there is little good news to report at the moment about the state of Australia’s junior explorers,” BDO said in its report.
“The fact that almost one in five explorers is not actively exploring, is symptomatic of the difficulty the sector is experiencing in obtaining financing.
“And that, in turn, is driven by low commodity prices and a reduction in demand.
“As a result, the market simply isn’t responding to second, third, fourth – and more – rounds of funding, which are typically required to take a project from exploration to production (or to being sold to a producer).”
According to BDO there are a number of reasons to indicate why some junior explorers are able to attract funding, while an ever-increasing number of their peer group is having to either suspend exploration or make severe cost-reduction measures in order to maintain their listing space on the bourse.
The firm pointed to the number of companies looking at other sectors in order to survive current market conditions, citing Perth-based International Goldfields, which has acquired an 85 per cent stake in the South American medicinal marijuana company, Winter Garden Biosciences as an example.
This isn’t a new phenomenon, as BDO explained, over the past two years, a there has been an obvious movement of companies from the mining and gas and oil, sectors that have been the target of backdoor listings.
“Right now, the challenge for many companies is to try and ride out the next few years, until prices are once again more attractive,” BDO said.
“This means that a company with maybe $1 million in cash reserves is forced to make a decision about whether they spend this on exploration which at a minimum quarterly cost of around $600,000 won’t last long or to simply reduce expenditure to the bare minimum.
“Another strategy that some explorers are taking is to focus on their best project and divest themselves of any other projects.
“While during the resources boom there was an argument in favour of explorers spreading their capital across a number of different projects in the hope that one would work out, it’s now more important to hone in on strengths, be focused, and keep investors well informed about what the strategy being taken is and the progress being achieved.”