400 junior explorers at risk of going bust

400 small resources companies are at risk of going to the wall, unless they change their business or raise capital.

That’s according to Shaun Clyne, a partner at global law firm Norton Rose Fulbright. “They’ve got to do something or else they’ll be turning off the lights in the not too distant future,” he said, according to The Australian. Mr Clyne says most of those companies have market values of less than $50 million, and very few have enough cash to survive beyond December 2014. As a result, they will either need to raise capital, consider mergers, sell off assets, or farm out a portion of their projects to their larger cousins.

That may well suit miners such as BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO), Fortescue Metals Group (ASX: FMG) and OZ Minerals (ASX: OZL). With around 800 junior exploration companies listed on the ASX, they certainly have plenty of projects to choose from. The problem for the smaller explorers is that their larger brethren are focusing on their core, large-scale operations, cutting back on their exploration expenditure and have no urgent need to invest to build up their resource base.

That may change over the medium-term, but it may be too late for many of the junior explorers.

Another issue the juniors face is that investor appetite for resource exploration stocks has declined. Many retail investors are looking for dividends and a return on their investment over the short to medium-term, and that’s something the juniors can’t offer them. As a result, many capital raisings will have to be done at large discounts to current share prices, diluting existing shareholders and further scaring them off investing in high-risk, small resource stocks.

Foolish takeaway

The issues facing small explorers are also likely to feed into the mining services sector. Less exploration means less need for drilling equipment and all the associated infrastructure including temporary accommodation, transport and other services. The bloodbath in the mining services sector could be about to get a whole lot worse.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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