Was Rick Rule wrong to call a rout in resource juniors?

Many commentators had predicted that mediocre junior exploration companies would de-list or die off this summer.

The reasoning was that lots of companies were running low on cash, and poor-performing companies would have a tough time getting people to give them more money. Sooner or later, it seemed like the lights would have to go off for these companies. The arguments made sense, but how did it turn out? In my opinion, the trend is still in motion but it is taking longer than expected to see these companies go away.

Lots of companies are still running out of cash. Some are receiving financing and some are stuck with very low cash balances and no likely way out.

In at least a couple of jurisdictions that we’ve studied, a ‘capitulation’ among many of the poorest junior miners appears to be getting closer. Average cash balances on the balance sheets of junior miners are declining, and there are stark differences in cash balances between companies that are able to raise capital and those that cannot.

Exploration companies in Ontario are almost all broke…

The picture is clearest when we look at our Tickerscores data for Ontario exploration companies.

It’s worth mentioning that we define the ‘exploration stage’ as the period before a valid 43-101 resource has been published. A 43-101 is an audited report meant to estimate with good accuracy the size and grade of the ore body. Thus, the companies that were part of our study have not yet established an ore body.

The chart below shows the distribution of cash levels for exploration companies in Ontario.

Only the top 3 companies, out of a total of 21, have over $1 million left on their balance sheets, while nearly 82% have less than $400,000. That means the majority of the companies barely have enough cash to cover general and administrative expenses. These companies can barely afford to survive, let alone create shareholder value.

As you can see from the breakdown below, the top 3 richest exploration companies in Ontario have combined cash holdings that are twice the size of the other 19 combined.

What’s also interesting is that the 19 poorest companies in the group spent on average 76% of their cash on general and administrative costs. For every $1 they raised, $0.76 went towards paying management salaries, rent, and other costs of running a company – which typically do not result in discoveries or create value for shareholders.

In Nevada, explorers are also running out of cash…

Let’s tune into exploration in Nevada. This jurisdiction had 19 early-stage exploration companies in the third quarter of 2013 and is now down to 16. Evolving Gold was delisted, and two companies ‘shifted focus’ to properties in other regions.

The richest companies spent on average 40% of their cash paying general and administrative costs, while the poorest spent around 94% of their cash on G&A.

The top companies had around $2.6 million in cash on average – down from $3.4 million six months earlier, but the poorest averaged a paltry $31,000 in cash, down from $108,000 six months before. Some of these companies have less than your average paycheck in the bank and will probably have to be delisted soon. Others may ’switch focus’ to another field — say medical marijuana — and attempt to raise money again.

Although resource companies are not being ‘culled’ at a rapid pace right now, it looks like the industry is separating into two groups. A small number have the cash to continue operating, while a majority of companies are getting closer and closer to bankruptcy. We may not have seen a complete rout just yet, but from the looks of company balance sheets currently exploring in Ontario and Nevada, I think the trend is still in place.

Jeff also took a ‘deep dive’ on management shareholder interest earlier this year… It’s still a relevant topic for today’s investors, and we suggest you take a look if you missed it.

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