Tough would be the most appropriate word to describe the current climate for capital raising within the junior resources sector.

With investors weary of market conditions it has never been more difficult for juniors to raise substantial capital to explore, identify, construct and operate mines.

According to Australian Mines and Metals Association Senior Industry Policy Advisor Tristan Menalda, during the first seven months of 2015 there was not one junior mining company that floated on the ASX.

“However, if you go back to 2009, investors have championed over 270 new junior resources floats on the ASX,” he said.

Hartleys Director for Corporate Finance Dale Bryan said it was never possible to pick the bottom of a market, but there was encouragement the tide may be turning for resources stocks, given the strong M&A activity that had emerged in the space, the increasing private equity investment into resources companies, the tightening of supply across a number of commodities and the compelling valuation metrics across the sector.

“The falling Australian dollar is also helping companies with assets in Australia, given revenue is USD denominated,” he said.

“Market sentiment and activity are best in a rising market, even better than at the top of the market.

“One thing is for certain, with the weakness in the resources sector over the last few years, plenty of headroom has been created for a rising market.

"This is often the time in the cycle of maximum financial opportunity.”

Mr Bryan said there were ways juniors could overcome the challenges of raising capital in a difficult market and it came down to implementing key essentials that could attract potential investors.

“Obviously a quality project and quality management is essential,” he said.

“To most effectively tap into that funding and to maximise a company’s longer term funding certainty, a clearly defined and executed capital markets strategy is a must.

“Key elements of this capital markets strategy include the involvement of a well-regarded corporate advisor and broker and equity research that can assist in communicating the investment proposition.

“Maintaining market profile through targetted marketing to investors is also critical, as well as building relationships with key investors who can support your company over the longer term.”

Deloitte National Mining Leader (West) Nicki Ivory agreed and said although the current climate for capital raising was tough, it was not impossible.

“There is money available for good projects, even in the junior sector, but what funders are looking for is the quality of the projects and the quality of the management/board,” she said.

“There is no space for marginal projects and management need to have a realistic view of the project’s value, its bankability and balancing different stakeholders’ outcomes.”

In many circumstances traditional sources of capital raising might not be available to juniors, therefore they would have to turn towards alternative investments such as sovereign funds, private equity, hedge funds and other sophisticated investors.

“The days of doing a big capital raising on the stock exchange and almost blindly taking people’s money are sort of limited,” Ms Ivory said.

“There will still be some capital raised obviously on the stock exchange, but companies are having to cast their net a bit wider.”

With this in mind, the industry is seeing cash-constrained juniors implementing various alternative capital raising strategies.

“With access to international debt capital markets being restricted to borrowers with strong equity valuations and balance sheets (thereby bypassing many junior and some mid-tier miners), emerging trends are for juniors to offer bonds with higher coupon rates with some that secure the debt against the company’s assets, offering convertible notes or raise equity with a follow-on offering,” Mr Menalda said.

“Alternatively, miners have enacted strategies of engaging into profit-sharing agreements with major construction and logistic companies, where they receive a percentage entitlement of applicable positive net operating cash flows in exchange for investment (shares/cash/lower contracting rates) in the company.

“With depressed commodity prices likely to remain for the near term, we expect to see an increase in joint ventures as mining companies, including juniors, realise synergies and cost savings.

“In addition we expect there to be more acquisitions as Asian buyers and major mining houses acquire quality assets at bargain basement prices to secure supply in response to projected greater demand for commodities as a result of a rising middle-class in Asia, higher rates of urbanisation and comparatively strong GDP growth in our major trading partners.”

Even in poor market conditions over the past two years, Hartleys has undertaken over 50 equity raisings for its resources and energy clients, raising in the order of $750 million to finance exploration, development and production.

Companies range in size and every stage of the development cycle, from Sirius Resources and Ironbark Zinc to Emmerson Resources.

“In our experience, given the cyclical nature of commodity prices, particularly in the current volatile commodity price environment, the preferred capital raising methodology is typically by way of equity issue, whether through placement, SPP, right issue or a combination of these,” Mr Bryan said.  

“The right funding mix is different for all companies, depending on their unique circumstances, and we enjoy working with companies in assisting them to identify the right funding mix and successfully execute their capital raisings.”

Apart from mining companies doing all they could to attract investment (showcasing their high-quality resource and reserves, sustainable mine optimisation model, rightsizing their business, optimising productivity, minimising all but essential spend and displaying strong corporate governance), Mr Menalda said macro and micro economic reforms were vital to boost investment.

“For example, modest changes to the workplace relations framework which has been modelled by KPMG’s 2015 report Workplace Relations and the Competitiveness of the Australian Resources Sector, suggests that minor reforms could result in increased investment in the resources sector of up to eight per cent,” he said.

“This could be the difference between a mine in Australia or a mine in Canada receiving foreign investment capital.”