The mining sector was a strong beneficiary mid-week after the Chinese government pegged economic growth at around 6.8%, higher than had initially been expected.
At the larger end of the mining market, where recovery is well underway, the news came as a welcome bonus. Chinese demand for commodities, in particular copper, iron ore, zinc and nickel is likely to remain strong, and indeed, the base metals too were on the rise.
The read-across was simple enough: higher metals prices on strong demand will likely lead to higher profits for producing mining companies, which is why their shares were in demand.
It’s a slightly different story at the more junior end of the market, however. Indeed, notwithstanding strong commodities prices and the onward march of the major and mid-tier producers, juniors by and large still have it pretty tough, especially if they are still some way from production.
A reasonable, though rough reckoning, touted by the director of one junior explorer this week is that the sector on average is down between 20% and 40% over the past few months.
Why is this, when the rest of the sector is roaring away, and the broad economic backdrop remains so favourable?
One answer is that investors got so burned on junior companies during the great boom and bust of the middle part of the last decade, that they are reluctant to venture back in again. When the damage was at its worst, the entire junior mining sector was averaging losses of around 90% on the market or more.
This is a memory that dies hard, even ten years later.
But there’s more to it than that. The structure of the market has changed markedly over the intervening period between the last commodity price upswing and the current one. For one thing, the internet has taken off, investors can be far better informed, and far more choosy about where they put their risk capital.
And it’s also true that this time round there are more options for risk capital. Blockchain has arrived, with a variety of crypto currencies tagging along with it and more set to come. And in North America there’s also the ongoing effects of the legalisation of cannabis in some US states. A huge amount of risk capital is going into funding business that look to capitalise on that opportunity too.
But on the whole, blockchain and cannabis are just distractions for investors. They don’t in and of themselves account for the continuing aversion the market has to taking exploration risk.
A greater part of the explanation probably lies in the increased sophistication of financial markets themselves.
In previous cycles, those looking for real leverage on commodities would always bet on the junior miners. The risk was greater, yes, but so then was the upside. In a rising zinc market, a company on the cusp of major discovery would provide far greater leverage than a company that’s already booked a resource and is looking to build a mine, with all the extra capital requirement that would entail.
There have been isolated examples of this old dynamic in the current cycle, notably on the Fraser Range in Australia, where new nickel projects have boosted value multiple times over the initial outlay. Some gold projects have done well too, but not many. The stellar shine has now rubbed off the lithium explorers, and all across the sector juniors are still finding it a significant struggle to raise equity.
Instead, investors seem to be putting their money into the growing plethora of financial instruments that provide exposure to metals prices, and which also provide insulation against the risk of actually mining.
How robust these derivative will turn out to be in the event of a major financial meltdown remains open to question, and analysts occasionally amuse themselves by researching by just how much of a multiple the derivative market in any given commodity is actually outpacing supply.
But such sophisticated financial sophistry is of no help to the struggling junior. Instead, we continue to see financings of the order of a few hundred thousand pounds or dollars, in a market that one might have though would be looking to be more ambitious by this stage in the cycle.
Some companies do manage of course, as there are always exceptional opportunities at any stage in the cycle.
W Resources (LON:WRES) recently tied Blackrock into a significant funding package for the development of a tungsten mine in Spain.
Lydian Resources (TSE:LYD) looks to be making a successful fist of building the Amulsar mine in Armenia.
There aren’t too many coming along behind them, though. And, as long as capital remains as scarce as it is, the paucity of properly funded exploration is likely to continue to dog the industry. What’s needed is either a further improvement in commodity prices, or the intervention of some entrepreneur to come up with a whole new way of funding the sector.