Way Forward For Juniors R Schodde AusImm 7 July 2009

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Information about Way Forward For Juniors R Schodde AusImm 7 July 2009

Published on July 8, 2009

Author: RichardSchodde

Source: slideshare.net

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The Junior Exploration sector is currently facing difficult times. The presentation details how the Australian industry responded in the last downturn - and identifies survival and growth strategies for junior companies

The way forward for the Junior Sector in difficult times A Case of When the Going Gets Tough? Richard Schodde: MinEx Consulting AusIMM Technical Meeting Melbourne, 7th July 2009 MinEx Consulting Strategic advice on mineral economics & exploration

Overview • Review how the Australian junior explorers responded to the bust in the late 1990s – Who disappeared and how did it happen? – Who were the winners and losers? • Using data from the published reports identify the spending and cash raising patterns of the Juniors over the business cycle. From this make projections on: – Likely future level of spending and where its going – How many companies are under stress and who might disappear • Comments on how the industry can rise to the challenge MinEx Consulting Strategic advice on mineral economics & exploration 2

December 1998 versus December 2008 • In December 1998 there were 215 junior mineral explorers listed on the ASX . By December 2008 this had grown to 554 companies …. But 425 of these are new entrants, with only 154 of the original 215 companies lasting the distance Question - What happened to these companies, and what lessons can we learn from them? MinEx Consulting Strategic advice on mineral economics & exploration 3

In recent years a large number of Junior Explorers have entered the market Number of Additions/Deletions in Quarter 50 40 Deletions 30 New IPOs 20 10 0 Caution No data on Deletions prior to June 1998 -10 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Note: Data excludes IPOs for Producers Source: MinEx Consulting based on ASX data MinEx Consulting Strategic advice on mineral economics & exploration 4

The industry has gone through a major boom-bust Level of exploration in Australia: 1992-2008 Total Expenditures (2008 A$M) Total metres drilled (Million) 2007 Expenditures 1997 down 50% from peak in 1997 Note: Data reported on an annualised basis Source: ABS 8412.0, December 2008 MinEx Consulting Strategic advice on mineral economics & exploration 5

But the situation wasn’t as bleak as it first appears • Of the 215 Junior Explorers that were around in Dec 1998, only 28% of them disappeared • Of the 61 Junior explorers that disappeared, the main factors were: These are what 46% were taken-over investors want ! 25% were promoted to Producer status Ie 16 out 215 Junior Explorers ultimately became Producers. 2% relocated overseas This gives a conversion rate of 7% 10% went bankrupt 19% turned into Dot-Com companies MinEx Consulting Strategic advice on mineral economics & exploration 6

And much of this didn’t happen overnight • In December 1998 the average age of the junior explorers was 5.6 years. Those that ultimately disappeared, lived on for another 6 years …. Giving a total average life expectancy of 12 years This is comparable the average life expectancy of a dog (8 to 15 years) In 2007 the median period between marriage and divorce in Australia is currently only 12.5 years Source: ABS 3307.0.55.001, 2008 MinEx Consulting Strategic advice on mineral economics & exploration 7

Winners and losers in the last downturn Winners • Those companies who used new approaches to exploration to find the elephants: – Minotaur (Prominent Hill), BeMaX (Mineral Sands), Moto (gold in the DRC) • Those companies who had the vision to take strong positions on big company discards: – Oxiana (Cu/Au at Sepon) and Indophil (Cu/Au at Tampakan) • Companies that had the vision to be first into a neglected commodity – Fortesque (Iron Ore), Paladin (U3O8) Losers • Dot-Com companies • Those companies that went to sleep and missed the subsequent boom MinEx Consulting Strategic advice on mineral economics & exploration 8

The key challenge facing junior explorers • Because most junior companies are still at the exploration stage they need to continually raise money to fund their programs – Lower commodity prices makes it harder to get a project into production or sell the project – The Global Financial Crisis has made it harder for exploration companies to replenish their funds MinEx Consulting Strategic advice on mineral economics & exploration 9

ANALYSIS How did companies survive the last downturn? • Using data published by the Juniors in their quarterly reports to the ASX it is possible to determine long term trends in the: – Level of cash available – Typical rates of expenditure (and where it goes) – Average life expectancy of a company if no further funding becomes available The analysis was used to make observations on how the industry survived the last down turn and develop strategies for companies going-forward MinEx Consulting Strategic advice on mineral economics & exploration 10

Snapshot of cash position of Australian Junior exploration companies: end-March 2009 A$ Million Average cash Median cash position position is $9.1m is $2.10m (ie half of the companies are above/below this figure) Quartile 3 Quartile 1 Source: Derived from Company quarterly Note: Survey based on random sample of 256 junior explorers listed on the ASX reports lodged with the ASX of which 168 were active end-March 2009 out of a total of ~550 companies MinEx Consulting Strategic advice on mineral economics & exploration 12

Change in cash position: 1998-2008 Sample of Australian Junior Exploration Companies A$ Million per company Even in tough times it is possible to raise money $2.10m $0.62m Note: Survey based on random sample of 256 junior explorers listed on the ASX between December 1998 and March 2009 MinEx Consulting Strategic advice on mineral economics & exploration 13

Change in expenditures: 1998-2008 Sample of Australian Junior Exploration Companies A$ Million per company Company expenditures have been halved in the last six months $3.38m $1.34m $1.49m Note: Expenditures are reported on an annualised basis Source: MinEx Consulting MinEx Consulting Strategic advice on mineral economics & exploration 14

Cash burn rate for Australian Juniors(Years) Annualised cashflow divided by cash reserves Years Median life expectancy remains at 1 year 1.14 0.60 Without additional funding, a quarter of the industry will go out business within 6 Source: MinEx Consulting months … but that’s nothing new !! MinEx Consulting Strategic advice on mineral economics & exploration 15

Sources of Cash by Junior Explorers Breakdown of total cash income Breakdown (%) AVERAGE NUMBERS Most cash is raised from share issues after the initial IPO Caution: Numbers are based on total cash raised for the entire survey group, and so the overall percentage split by activity is influenced by the actions of the larger companies Source: MinEx Consulting MinEx Consulting Strategic advice on mineral economics & exploration 16

Uses of Cash by Junior Explorers Breakdown of total cash expenditures Breakdown (%) AVERAGE NUMBERS Most cash is spent on exploration and development Caution: Numbers are based on total cash expenditures for the entire survey group, and so the overall percentage split by activity is influenced by the actions of the larger companies Source: MinEx Consulting MinEx Consulting Strategic advice on mineral economics & exploration 17

One possible industry response What bears do in hibernation “What do directors of speculative companies do during bear markets? It’s rather like asking what Collingwood supporters do during the cricket season or what soldiers do when peace breaks out. In the case of Blue Sky Mines, the Directors have sensibly contracted the company’s activities so that it has been running purely on administrative costs for the past six months. A shareholder at the Annual Meeting last year described us coarsely as management fee- bludgers and was expelled from the proceedings.” Pierpont Source: The Official History of Blue Sky Mines by Trevor Sykes 1996 MinEx Consulting Strategic advice on mineral economics & exploration 19

Where is the money being spent? Expenditures on Exploration + Development versus Administration A$ Million pa for the Median Company Money into the ground has been sacrificed $2.48m $0.91m $0.79m $0.68m $0.42m Currently half of the Note: Refers to Median Company Junior’s funds are spent Expenditures are reported on an annualised basis on admin/overheads MinEx Consulting Strategic advice on mineral economics & exploration 20

Five key tips to Survival 1. Work hard on developing a loyal shareholder base - Frequent communication. Send hard copies of your Annual Report 2. Raise money when you can - But need to pin it to a good story - Keep the project ideas coming forward 3. Keep head office costs to a minimum - Share costs with like-minded Juniors 4. Incentivise your staff - Reward them well and give stock options 5. When spending money on drilling, make sure it’s well spent by camping out with the drilling crews - Spend time developing good relations with the local community Source: Rob Annells, Executive Chairman of Lakes Oil, as quoted by the Garimpero, Age 13 Oct 2008 MinEx Consulting Strategic advice on mineral economics & exploration 21

SUMMARY – The Industry faces tough times • The industry is midway through the down cycle – If the last downturn is any guide, expect expenditures to drop by half from the 2008 peak • Without fresh funding, a quarter of the industry will close down within 6 months and half of the industry within a year … but the real story is not that bleak MinEx Consulting Strategic advice on mineral economics & exploration 22

But history shows that the Industry is made of tougher stuff • Junior Explorers have always operated with limited cash reserves and short time horizons • It has faced similar challenges in the past and survived – However some companies will still fail. – My guess is at most 20% of the juniors could disappear within 12 months • The down turn also impact the service providers – Drilling activities and analytical activities may drop by half – State Government drill funding programs will soften this blow MinEx Consulting Strategic advice on mineral economics & exploration 23

Looking forward take advantage of the opportunities • The current climate creates great opportunities for acquisitions and consolidation • History shows that great companies are born in adversity • Need to focus on what’s important - success comes to those with a strong vision to find quality assets. – Now’s the time to hire that “gun” geologist, look in the greenfields for the next giant deposit, buy the next “Sepon”, or take a key land position in a neglected commodity / country MinEx Consulting Strategic advice on mineral economics & exploration 24

CONCLUSIONS • The key to survival hinges on the Junior’s ability to raise fresh money from its existing shareholders • To earn the shareholders’ trust, companies need to continue communicating their vision/strategy . Most importantly, companies need to deliver good exploration results • The risk is that, in the race to conserve cash companies are cutting back on the expenditures in the field. You can’t make discoveries if you don’t drill holes ! The industry will rise to the challenge !! MinEx Consulting Strategic advice on mineral economics & exploration 25

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