MENU

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.

Avoiding mining services and resource stocks? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

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

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!