We can see from the comments and feedback from Part 1 that this is a very important subject to many. From the feedback we have determined it warrants a follow-up article – herein as Part 2.
The junior mining sector used to be clearly divided into three sectors, Prospectors/Stakers, Promoters/Developers and Producers and it worked very well.
The Prospectors/Stakers went out in the bush staking claims, breaking rocks, and in general discovering things of interest. They followed this up by building enthusiasm around their new discoveries Yes, it does indeed sound strange to once again be saying ‘New Discoveries’. Most of their value added contribution to this cycle was their research and knowledge of the regional geology and their heart-felt labour. Once they had their story together they would seek out a Promoter/Developer to Option or Purchase their ground package. The Prospector/Staker would be paid in some agreed combination of cash, shares, work commitment and a royalty by a listed junior mining company usually managed by the Promoter/Developer. These Prospectors would be working on one or more grassroots projects at a time. They became the key starting point to many a mine and people like me place them as some of my most important contacts we have, even today. The industry is dead without them.
The Promotors/Developers occupy the middle level of the 3-tier cycle. They obtain most of their company’s prospective assets from the Prospectors/Stakers and then set out to develop the acquired assets (the speculative claim holdings). They would either create a listed public company for the assets or place them into a company they are presently managing. They then would set out to sell the merits of the newly acquired project to potential investors and raise funds through private placements to meet the commitments they have made to the Prospector/Stakers in their Agreement. They expend the funds raised on more detailed prospecting, geophysics (air and ground), drilling and geochemistry to assess the true potential of the claim group. Once they have identified anomalies to target they would attempt to drill out a significant mineralized zone which could somehow be confirmed as a resource. Once these Promoters/Developers were confident that they had added as much value as they could, and built up a marketable resource, they would approach a Producer (commonly referred to as a ‘Major’) and repeat the same promotional sales strategy that the prospector/staker used on them. The big difference at this stage is that the claim package is no longer grassroots in nature. The property has hopefully been enhanced considerably and the value would have increased accordingly. The junior mining company and its Promoter/Developer team would seek to entice the Producer into a purchase/sell agreement or an option agreement which would contain conditions and obligations which would encourage the Producer to take the project through to production. The terms of such an agreement would hopefully involve the junior mining company receiving a cash payment at least equal to but hopefully exceeding the amount of money spent to date by the junior mining company, a continued participation in the project, a work commitment through to production, an area of influence interest, and some sort of royalty. The Producers (the Majors) would seldom, if ever, reward the junior mining companies with shares of the Producer. (a whole different story for another day).
The Producer that has entered into such an agreement with the junior mining company would then proceed with further expenditures on the claim package and take it to a point where either it is not meeting the Producer’s expectations for production and they drop it, or if satisfied all the way to production.
This was a very efficient 3-tiered cycle in the food chain where all could put food on the table. A version of it exists today, but not nearly as it once did. It does not function as clearly or as well as it once did or should.
What we were saying in Part 1 is that the boundaries between the 3 stages have been tampered with. The boundaries between the three tiers has somewhat diminished and appears quite opaque. There are numerous reasons why this has happened but some are more important than others.
Firstly, was the push by the brokerage and finance industry on the junior miners to out-do themselves and tackle the large Capex production part of the cycle without the usual involvement of a Producer. For most junior mining companies that have attempted this move it has proven both idiotic from a corporate perspective and extraordinarily dilutive and risky for stakeholders. Junior Miners are just not Producers. Yes, some do succeed at it, but most fail miserably.
Second, we have witnessed the new-wave mentality that there is more fame and glory in taking a mine into production than simply promoting a discovery and drill high grade intersections. This couldn’t be further from the truth. The promotion of the new discoveries and the exciting drill intersections in tiers 1 and 2 of our 3-tiered cycle was and is the driver of the industry. It made the Prospector/Stakers proud and provided them with respectability and credibility. If one of their grassroots discoveries was acquired and eventually placed into production by a Producer their future properties became really easy to market. It is the discoveries and the massive drill intersections that attracted mountains of cash, which in turn made the world go around. We can all rifle off the names of the discoverers and developers of many of the world’s big exploration projects and discoveries. Few if any of us can rifle off the names of a single mining engineer who meticulously sat in their offices and planned and led the discoveries into production.
No offence folks, but all the excitement was derived from the primary cycle and the middle cycle with the Prospectors/Stakers and the Promoters/Developers. The really big speculative bucks were made in the middle cycle, in anticipation of the potential and possibilities of the projects. The exits and flat line on the charts appeared once the Producer announced they were going to take the project into production. Producers spend a long time planning, preparing and financing production. They incur a lot of debt that needs to be paid back before stakeholders see any returns. It’s boring to the investing public. By this production time in the cycle the big bucks have been made and that money is off the table and moving into the next deal at the Promoter/Developer level of the cycle. Take note – Speculators and Investors in junior mining companies are not dividend clippers.
A third and very unfortunate calamity to befell the junior mining markets was when the very ‘non-speculative’ banking industry was allowed to enter and undermine the speculative markets by not only taking control of the stock exchanges but the independent brokerage firms as well. Their culture is completely opposite to junior markets and speculation. No doubt that when they purchased the TSX and the TSX.V that sales of Alka-Seltzer and Aspirin leaped in Toronto and Montreal. They have no real interest in the speculative markets and simply treated it as a cash cow until the cow stopped producing the cash and began producing blood. The junior mining industry is now dealing with the result of their participation, carcasses all over the market. The banking and insurance industry invests in Producers but not in Junior Mining companies. Historically, the independent brokerage firms were the primary source for ‘brokering’ cash for the junior mining markets for decades. Most have been swallowed up the financial institutions and their remains are no more than mutual fund marketers. How many ‘Brokered Private Placements’ do you see brokerage firms carrying out today? Very, very few. You will see some brokers earning mere ‘finder’s fees’ on non-brokered private placements that are managed and controlled by the junior mining companies themselves.
The last item we will make note of here that has caused issues in the junior mining cycle is a rather meaty one. It is the introduction of many useless rules and regulations by overzealous regulators. Many of these people have no experience in our industry, and have little idea what they are doing or the ramifications their doodling is causing. One can only conclude that those that did have experience in the junior mining sector have been incapacitated by amnesia. They are a major reason the industry is in the mess it is. We have heard it said that they are supposedly utilizing some form of external committees to provide them with intelligence in their decision making and instruction of new and modified rules and regulations. Somebody here has to be pulling our leg, right? Perhaps they are seeking some form of intelligence from somewhere – but, they are certainly not getting much in the way of value for their money.
Consequently, these institutions have introduced an overabundance of rules, regulations and policies that are very dangerous to the very existence of the junior mining industry. They cannot possibly police the Exchange and Securities regulations, rules and policies we have reviewed with any consistency to matter or make a difference. In fact, in many instances, they simply don’t.
Most of their rules, regulations, policy and other activity production is a direct result of a single series of events surrounding the Brex gold scandal of the mid-1990s. Yes, we all know Brex was not good. There were a good many real cash and paper fortunes made on the rising Brex share price and there were a good many real cash and paper fortunes lost on the decline in the Brex share price. There was a good deal of money taken off the table as the Brex share price moved in either direction. So if we net the dollar value of all the Brex trades, on both the win and loss side of the ledger, what was the actual ‘net’ outcome? Was there really a general dollar loss to the public worthy of all the ‘billions of dollars’ of stakeholders money the junior mining companies have had to raise in order to fund the never-ending stream of over assessments they have had to pay stock exchanges, securities regulators, banks, insurance companies, accountants, auditors and legal firms over the past 20 years?? We think not. Perhaps the real scam here is in the dollars raked in by Exchanges, Regulators, Accounting and Audit Firms and the Legal Firms as a result of the Brex debacle. What’s your guess?
The junior mining companies and their stakeholders (the investing public) appear to have been sentenced by someone or some group (??), even though not one operating today is guilty of anything, to a lifetime of unnecessary and extraordinarily over-priced filing fees, insurance, listing maintenance assessments, accounting and audit costs, legal fees and so on and so on; in in the name of CYA? Are these endless levies, caused as a result of an event 20 years ago, having a tremendous impact on the very ability of junior mining companies to stay alive today? You probably do not have to think very long and hard before you answer that question. The actual and real impact of this is an absolutely onerous redirection of stakeholder funds. It is truly a threat to maintaining the industries 3-tiered cycle intact and those within it earning a decent living. The livelihood of many has become endangered and they have simply given up and fled the industry; many permanently. This leaves big voids in the fabric of the 3-tiered cycle. Are we to come to terms with the fact that to the detriment of Stakeholders, Prospectors/Stakers, Promoters/Developers and perhaps even the Producers every one of today’s junior mining companies has wrongfully been tried and assessed a lifetime of overcharging and penalties for one non-existent firm’s wrongdoings – 20-something years ago. Heck the PDAC got its Felderhoff’s annual award back didn’t it?
There are many other reasons why the mining world as a whole needs to maintain and preserve its unique 3-tier structure. The industry needs its handcuffs and muzzles removed once and for all. It wants its life back! The industry needs that middle space occupied by the Promoters/Developers of merit for investors and speculators to return. Yes, I think we all agree that there should be a set of rules, regulations and policies to be administered by the management of the TSX and the Securities Regulators. Since self-regulation seems to be the good theme, perhaps the participants of the junior mining sector should get together and set its own rules and regulations and police them themselves.
Food for thought – Those that lie should be the ones that cry, those that try will be the ones that fly, and those that soar will be the ones that comply. Otherwise we may as well just turn the lights out.
The contents of this article are the sole thoughts and opinions of Patrick D. O’Brien of the Editor-in-Chief of JuniorMining.com.