by: Robb M. Stewart From: Dow Jones Newswires June 12, 20129:22AM
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SHARES in Australia's smaller mining companies have been particularly hard-hit in recent weeks, a shift that could spur a round of deal-making while equity valuations are depressed.
"I'm not sure everyone has noticed just how badly hammered the junior sector has been," said Jonathan Downes, managing director of Ironbark Zinc, a metals explorer in Greenland and Australia. "Everyone is a little shell-shocked."
Junior miners are small companies developing, or seeking to develop, a resource deposit. Like start-ups in other industries, they often are in need of funding as they try to expand or build a mine, or are looking to be bought by a larger company.
Mining executives and industry followers say capital markets have again closed for many mining companies, particularly small exploration firms and those without cash-generating operations.
As commodity prices have slumped and worry has mounted over near-term demand, the S&P/ASX index of small resources stocks has fallen 18 per cent since the start of May.
Cape Lambert Resources postponed a planned initial public offering for an iron-ore project in West Africa last week, but said it remained open to discussing a sale of the asset.
"It is now a better environment to find [acquisition] opportunities for us than even a few weeks ago," Ironbark's Mr Downes said. "Although I'm sure the shareholders are less impressed with the fall in the shares."
Shares in Ironbark have fallen roughly 18 per cent over the past month. But the company is in an unusual position for a junior miner, with $50 million in funding available to it from Swiss commodities trader Glencore International AG.
"Will there be more consolidation? The short of it is yes," one fund manager said.
He said that the gold sector, in particular, had been hit, with many smaller companies trading at their cheapest levels in four or five years and at a sharp discount to the net-asset values of their projects.
"At some point, the panic moves in the markets will stop," he said, adding that for now there was room for some companies to seek out mergers and acquisitions, particularly where the cost of buying a gold project was cheaper than developing a project from scratch.
Fund manager BlackRock and specialist resource fund Baker Steel have targeted gold, increasing their holdings in Indochine Mining this month as the small, ASX-listed exploration firm sold stock to raise funds.
The money raised by the Sydney company will be used to develop a project in Papua New Guinea.
Larger companies, particularly those with better cost controls and cash in the bank, are the most likely to take advantage of falling valuations.
OZ Minerals, for one, has been scouting here and in other countries for investment targets for almost $900 million in cash, the legacy of a restructuring in 2009 after the global financial crisis that left it with one copper-gold mine in Australia.
"For OZ Minerals, the current environment may open up new opportunities in regard to acquisitions and joint ventures," chief executive Terry Burgess said in an emailed reply to a question.
Still, even the biggest mining companies are becoming more cautious. BHP Billitonand Rio Tinto have both recently said they now plan to ration investment on expansion projects in Australia and worldwide.
Tim Schroeders, a portfolio manager at Pengana Capital in Melbourne, said the fall in equity prices might in fact act against wider consolidation.
He said Chinese companies, which had been eagerly seeking out sources for coal, iron ore and other commodities, had been less aggressively targetting assets in Australia of late.
That might give other companies more time to consider their approach to deals, he said.
"I'm sure there will still be consolidation. Companies with good projects will always be attractive," Mr Schroeders said. "But I think we're entering a more discerning part of the cycle."
IBG Price at posting:
15.0¢ Sentiment: Buy Disclosure: Held
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