Junior miners enter the deep freezeTony Boyd, from...

Junior miners enter the deep freeze

Tony Boyd, from AFR

Australia’s junior mining sector is starting to look like the freezing, wind-swept Russian Tundra following the collapse in the gold price, the fall in commodity prices and unwillingness of investors to back companies with no cashflow.

The volatility in financial markets is not helping a sector of the market that is likely to remain in a deep freeze for a long time to come.

Veteran bankers have told Chanticleer that the time is approaching when the backers of small resources companies will do what they did in the late 1990s and get out of mining and into technology.

The dotcom boom in the 1990s was accompanied by a rush of small mining exploration companies transmogrifying into IT companies. At that time lack of cashflow was not a problem. The germ of an idea was enough to obtain bubble-like market valuations.

Some junior miners are now trading at significant discounts to their cash backing.

Chanticleer has heard of one listed company with a market capitalisation of $5 million and cash at bank of $12.2 million. Another company has a market capitalisation of $5.8 million and cash of $8.5?million. For example, coal exploration company Bandanna Energy has a market cap of $55 million and cash at bank of $82 million at the end of April.

These sorts of discrepancies could persist for some time.

It is not just the junior miners who are being hit hard by the negative market sentiment.

The 10 worst-performing companies on the S&P ASX 200 over the past three months include four gold miners: St Barbara (down 28.9 per cent), Oceanagold (down 30 per cent), Newcrest Mining (down 35 per cent) and Perseus Mining (down 40.7 per cent).

The list also includes Australia’s biggest rare earths producer, Lynas, which is down 34.7 per cent in the past three months. However, the worst-performing stock is Billabong, which is down 70 per cent after a failed takeover offer.

There will be a range of responses to the dark developments in financial markets.

Some junior miners with cash reserves will sit tight and wait for a recovery. Others will lobby the federal opposition for tax breaks for exploration.

Others will probably merge in order to save the annual $500,000 cost of being listed on the Australian market.

Finally, there are those that will try to crack through the surface of the Tundra and join the ranks of the technology stocks.