TORONTO, December 20, 2005 — Following impressive injections of new capital by investors, Alternative Investment Market (AIM) mining companies will have to show they can convert investment projects into successful producing mines. Junior Mine, a comprehensive analysis of AIM mining companies by PricewaterhouseCoopers (PwC), shows that the junior mining industry has delivered a substantial increase in investment, financed almost entirely through successful capital raisings. The analysis covers the top 50 mining companies on AIM, including 12 Canadian companies.
Understandably, AIM mining companies are fast-tracking new projects and seeking out new opportunities to take advantage of high commodity prices. The most striking development was a 170% increase in cash spent on investing activities, up from US$296 million to US$799 million. This compares to an increase of just 11% by the 40 largest mining companies. The extra investment included a 182% increase in capital expenditure (including mine development) to US$388 million, and a 126% rise in exploration spending to US$172 million.
This huge increase in investment was made possible by investor confidence in the industry. The net cash obtained from financing activities of US$1.25 billion included nearly US$1 billion raised through the issue of shares, up 220% from US$302 million. Retained cash balances more than doubled to US$733 million, suggesting the AIM mining sector is well placed to complete the projects already underway and exploit new opportunities.
“The challenge now facing AIM mining companies is whether they can convert these investment projects into successful producing mines which deliver acceptable returns even in the lower points of the commodity cycle,” says Paul Murphy, PwC’s Canadian Mining Practice Leader. “There must be a risk that funds are being channelled into projects that would have been rejected a few years ago.”
“It will be interesting to see whether the successful companies will emerge as new mid-tier producers or whether they will be swallowed up by the world’s largest mining companies through further industry consolidation,” says Murphy.
The report shows that investor confidence in the junior mining industry has continued to strengthen on the back of a sustained boom in commodity prices. In the year to 31 December 2004, the AIM mining market capitalisation increased by 47% to nearly US$10 billion — much higher than the 19% growth rate for the global mining industry as a whole over the same period.
Higher commodity prices and production increases combined to deliver a 46% increase in top line revenue, up from US$437 million. However, aggregate revenue was modest relative to the amounts being invested in growth for the future. More than half of the 50 largest AIM mining companies had no producing mines in 2004.
Increased charges from exploration activities more than offset the benefits from higher revenue, with aggregate net losses rising from US$17 million to US$127 million.
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