Small South African Miners May Merge to Raise Funds

Analysts say miners seeking cash to build marginal projects made viable by the commodities boom are now finding it difficult as clouds gather over metal prices, making investors more selective of which projects to throw their money at.

"These are volatile times and in such times investors prefer producers rather than explorers," Heye Daun, a Cape Town-based metals analyst with Bright Equity said. "Real cash flow is king and projects with future cash flows will not be favoured."

The battle to raise cash by junior miners was highlighted last Friday after Pamodzi Gold's said it had failed to lure lenders to help it raise $50m, while Lesego Platinum flopped last month with a planned listing on Johannesburg in a bid to raise $20m after investors got cold feet.

Pamodzi, which has bought some marginal mines off Africa's third biggest gold producer Harmony Gold, wants the cash to help it lift output to one million ounces a year within a two years from its output of below half a million ounces.

Pamodzi said it would continue to seek the funds after international lenders such as Deutsche Bank backtracked from the deal citing inadequate security, which spooked investors who dumped its shares which fell around 17% percent on Friday.

On its part, Lesego Platinum even thought of cutting the listing price for its shares, but failed to convince investors.

"The problem was the overall market sentiment. We did investigate whether reducing the price, but the market simply was not interested," Lesego's director Mike Scott said.

Dig deeper

Lesego wants the cash to sink deep vertical shafts that some junior miners have to dig for platinum or gold in areas where shallower prospects are already being mined by mining majors. This adds to the projects' risks in terms of extra technological and financial burdens as well as availability of scarce mining skills, which have conspired to put off investors.

Despite the setbacks, other juniors are lining up to convince investors that their assets are worth placing a bet on.

Wesizwe, a former exploration player, hopes to raise R5.6bn ($719.4m) in debt and equity to further develop its flagship Frischgewaagd-Ledig project, and platinum explorer Platfields wants to list this October to raise R200m for exploration and gold mining.

"The problem facing juniors is they have small assets and require deep shafts, which poses a high risk in terms of completion," said a Johannesburg-based analyst who declined to be named. "Their projects require high capex, difficult technology, long lead times and this is risky for investors."

With such considerations, analysts say most investors are of the view that bigger producers are more likely to develop such projects successfully, and this could pave way for acquisitions.

Mergers

The merger talk is given even more weight by sharply lower share prices among miners, with some junior players seeing their stock sink by more than a third on the back of falling metal prices, making them attractive to bigger companies.

Platinum has fallen from around $2,300 earlier this year, while gold has fallen from around $1,030.80 in March, on a stronger dollar and a slowing global economy.

Stuart Murray, chief executive of Aquarius Platinum said at the firm's results presentation it might be easier to strike deals among platinum juniors now than in the good times, because he expects common sense to prevail during the bad times.

With Xstrata's $10bn bid for Lonmin as a trigger, some analysts said it was more likely that bigger players would swoop for smaller capital-hungry junior miners with solid assets rather than consolidation between juniors.

But former Harmony chief executive Bernard Swanepoel, now a director of To the Point, a consultancy that helps companies grow, says consolidation among smaller players was looming.

"I expect that there is unashamedly going to be consolidation among juniors in platinum," said Swanepoel, who helped Harmony grow six-fold from a single mine in his tenure.