Gold juniors struggle to secure financing

In the first half of 2011, the Yukon enjoyed another gold rush, with a surge of exploration companies seeking a new mother lode in the largely unexploited wilderness.

Investors had high hopes that the Canadian territory could become the next Nevada, one of the largest sources of gold in the world, but the excitement was unsustainable.

As recession fears and the Greek debt debacle dominated headlines, investors became extremely risk averse and the newer exploration companies, still years away from production, struggled.

Looking at the performance data from 2011, companies labeled as “high risk” underperformed in the hostile environment, while the more established companies just skimmed by.

And despite global excitement over exploration companies, those that require capital to maintain their drilling programs continue to face difficulties, due to the fact that equity financing is scarce.

“In 2010, exploration companies and development companies were largely supported,” says Jennifer Law, vice-president, CIBC Asset Management.

“In this vastly different capital market, however, risk appetite is only starting to improve and investors are steering clear of the political and geological risks associated with some of the new companies.”

When creating a portfolio, Law suggests that investors diversify across business stages.

“The way to do this is by incorporating a variety of companies,” Law says. “Include companies in the exploration stage, as well as some companies close to production and some companies with current production.”

She stresses that support and funding has not yet been re-established for these exploration companies, and that it needs to be fostered—gold was up by 11% last year but mining juniors were surprisingly still down by 30%, representing the massive discrepancy in 2011 performance data.