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Silver Juniors: Attraction in a Risk-Averse Market

Posted on 2012-11-05, By A-Best Staff

Silver Juniors: Attraction in a Risk-Averse MarketGiven that the silver market currently contains plenty of junior miners, a strong aversion to risk, and shrinking sources of finance, it may be time for juniors that want to remain competitive in the silver space to step their game up. 

The state of equity markets plays a key role in shaping trends and strategies in the exploration industry from year to year, World Exploration Trends 2012 says.

Junior mining is a high-risk, capital-intensive business. When equity markets are vibrant, risk-friendly environments, junior miners can raise attractive amounts of cash. That is what happened in the latter part of 2010 and the first half of 2011 when explorers raised some $7.4 billion. But those conditions began to fade in the second half of last year.

“The perception that’s out there in today’s environment for junior developers and explorers is extremely negative,” Wendell Zerb, a mining analyst at Canaccord Genuity, told the Financial Post.

Acquisitions have slowed and financing has dried up, he pointed out.

For junior miners, access to a lifeline is becoming increasingly competitive, which raises questions about how attractive silver juniors are in this market.

As economic uncertainty overhangs the markets, industrial demand for silver has weakened, leaving investors to pick up a lot of slack. But their appetite for the metal has also simmered down as we’ve moved through the year. Furthermore, prices have fallen while supply has risen, and it is expected to continue rising.

Adding to the challenging conditions that silver companies face are the loads of the metal being produced by miners in other sectors. In 2011, mine production accounted for 73 percent of the supply, but primary silver mines only contributed about 29 percent, and strong by-product silver production is a trend that is expected to continue.

When Coeur d’ Alene Mines (NYSE:CDE,TSX:CDE) recently announced intentions to issue $350 million in unsecured notes and enter into a $100 million secured revolving credit facility, Standard & Poor’s assigned a B+ corporate rating to the company and a BB- (one notch higher) issue-level rating to the company’s proposal.

S&P noted that the rating incorporates its view of the “company’s ‘weak’ business risk profile.” This conception is characterized in part by “limited mine diversity” and “the risks of being a primary silver producer,” including the fact that the majority of silver comes as a by-product of other mining activities, which “introduces additional uncertainty.”

Just as there are risks to being a primary silver producer, there are also risks to being a silver junior, especially given the current conditions. In a market where junior mining projects are in no short supply and silver is already abundant, silver juniors could could find increasing amounts of skepticism about their projects. Major miners and equity investors may begin to raise questions about projects or the ability of juniors to use the current conditions in their favor.

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