Exploration slowdown threatens future

Geologist Ron Parratt led AuEx Ventures in the mid 2000s when the minerals exploration company discovered the Long Canyon gold deposit in the Pequop Mountain west of Wells, a multi-million ounce deposit that’s one of the most significant finds in the past decade.

Times have changed, he says.

Parratt says advancing exploration efforts at Long Canyon in today’s economic climate, when cash-starved junior exploration companies are struggling to stay afloat, let alone raise capital for exploration drilling, would have been extremely difficult.

“We had some expensive items, the purchase of a ranch, for instance, that needed to be done,” Parratt said at last week’s Nevada Minerals Exploration Coalition annual meeting at John Ascuaga’s Nugget. “That was $15 to $18 million dollars. It would have been hard in this market to raise that money, and it would have taken longer to advance that project forward.”

Small mining firms operating in the state typically hold blocks of mining claims upon which they conduct extensive exploration drilling programs in an effort to keep the supply of gold deposits flowing to replace what’s being pulled out of the ground. Their inability to raise funds to identify new targets could greatly impact the state’s robust mining sector in coming years.

“We are not keeping up with production in terms of new discoveries,” says Jim Faulds, state geologist.

And the stakes for bringing new gold into production are incredibly high: Nevada produced $11.2 billion in minerals in 2012, the Nevada Division of Minerals reports. The 5.5 million ounces of gold produced in Nevada trailed only China and Australia — countries that are a combined 6.6 million square miles. By comparison, Nevada is just 110,567 square miles, with nearly all the gold production occurring in the remote north half of the state.

Just how bad is it for junior mining firms? As of last week, 68 percent of publicly held junior mining companies trading on the Toronto Stock Exchange’s Venture Exchange had share prices under 10 cents, and another 16 percent were under 20 cents. In November of 2010, the TSX Venture Exchange, which consists primarily of small resource exploration firms, had 2,364 listed companies with a combined market capitalization of $60.8 billion. It’s down 63 percent from that peak, Faulds says.

Ken Cunningham, president and chief executive officer of Miranda Gold, which has offices in Elko and White Rock, B.C., says many of the firms on the TSX Venture Exchange have just a few months of working capital left on their balance sheets and probably won’t be in business at this time next year.

That could benefit the remaining firms and their efforts to fund new development, Cunningham says, but it also could impact the discovery and development of new mines in the state.

Investment in the mining sector has cooled primarily due to massive losses from large and small mining firms. The largest gold production companies operating in the state, Barrick Gold and Newmont Mining Corp., each wrote off billions this year — though those investments occurred in foreign jurisdictions.

Faulds says that since 2008, more than $200 billion has been written off by the mining industry, with $50 billion alone coming from the gold sector.

“That doesn’t create a lot of confidence in the marketplace,” he says with a geologist’s typical dry humor.

In 2011, junior firms raised more than $5 billion for exploration, Faulds notes, but in 2012 that number declined to $2.8 billion, and this year junior firms have raised just $700 million.

For Miranda Gold, the net effect of the cash crises meant a layoff for three-fourths of its Elko staff and the decision to refocus efforts on the company’s holdings in Columbia after forming a strategic partnership with mining giant Agnico Eagle Mines Limited in an effort to control costs.

Investors today, Cunningham says, simply aren’t interested in junior firms, prospect generators or grassroots exploration. They want firms with hard assets or money in their treasuries for mergers or acquisitions.

“There will be another bull market, but I think it is going to take $2,000 gold to see another bull market in this sector,” Cunningham says.

Roger Steininger, director of Reno-based NuLegacy Gold Corporation, notes that the years-long time it takes to advance new gold prospects lies in stark contrast with an investment community seeking near-term returns.

Raising funds today requires a close-knit personal relationships with investment bankers and a strong technical story for prospective properties, mining executives say. The days of fundraising based on proximity to big mines on the Carlin or Getchell gold trends have ended. The investment community also has become much more savvy in its knowledge of geology and the state’s gold belts, Steininger says.

But with the correction in the industry comes some positives for the companies that still have funds for exploration. Costs for drilling and other services have declined, and new claim packages are available as companies consolidate their core holdings.

“It’s a good time to be in business,” Steininger says.