It was a tough year for the junior mining industry

Last year, Canadian junior mining companies faced an uphill battle in surviving the worst period of market deterioration the industry has faced in years.

According to our PricewaterhouseCoopers (PwC) Junior Mine report — a review of trends in the TSX Venture Exchange (TSX-V) mining industry — market conditions for the junior mining sector continued to worsen in 2009. This made many junior mining companies vulnerable to significant financial loss and led many to re-jig business strategies in order to weather the ever-changing economy.

Junior mining companies are anticipating a potential break in the proverbial clouds. The latter half of 2009 started showing signs of economic growth for the industry, allowing junior mining companies to start strategizing on how to dig themselves out of the economic troubles they have experienced since the onset of the global recession.

Last year, the junior mining sector was hammered with volatile market conditions. In an 18-month period ending September 30, 2009, market capitalization dropped more than 50%, falling from $18.1 billion in 2008 to $8.6 billion in 2009 for the top 100 mining companies on the TSX-V. Even the top five companies on the list were vulnerable to the global economic downturn with their total market capitalization falling from $5.3 billion to $2.7 billion from the year prior.

The global financial crisis also made it nearly impossible for junior mining to raise money to finance projects. In fact, cash provided by financing activities dropped by 21% from 2008. While some investors were willing to take a chance on production and development companies, others that were perceived as a high investment risk were largely ignored.

The economic downturn caused many junior mining companies to forgo expansion strategies that characterized the industry for years and switched focus to survival. As a result, cash conservation was widely adopted. With the top 100 TSX-V companies reducing expenses, exploration spending substantially declined in 2009. In fact, the same group wrote down a total of $644 million on mineral properties and exploration as projects were either abandoned or put on hold.

Others took on a more aggressive business strategy with many smaller mining companies undergoing mergers to strengthen balance sheets or fund capital projects, resulting in a 129% increase in acquisitions by exploration companies. In fact, the mining sector as a whole experienced a growth in merger and acquisitions in 2009, according to a recent PwC report on deal activity. While the number of deals increased by 16% in 2009, the value stemming from the deals significantly decreased from US$124 million in 2008 to US$52 million in 2009, signaling troubles across the industry.

Regardless of the decline, mining remained the dominant sector on the TSX-V in 2009 with the number of listed mining companies increasing to 48% from 44% in 2008.

Despite a difficult year for the junior mining industry, there are positive signs that the market may be on the verge of economic recovery. Prices of metals and other commodities are slowly reconsolidating as demand for raw materials to build infrastructure in the developing world increases.

Additionally, China is making strategic investments in Canadian juniors to decrease their reliance on Australia and Africa for raw materials. As a result, several multi-million dollar acquisitions of Canadian mineral assets took place in the latter half of last year.

Equally positive are results that found the value of public offerings on the TSX-V rose 54% to $937 million for the year ending December 31, 2009.

Although the going got tough last year for the junior sector optimism has returned to the market with strength in commodity prices and greater liquidity returning to the market place. Juniors with proven management and encouraging drill results can again raise money. The world continues to need metals and the junior segment of the industry is once again responding.

For more information, visit www.pwc.com/ca/mining. CMJ