The Mining Stock Report

While the global economic crisis has been sweeping both small-cap companies and blue chippers, junior mining companies are really feeling the pinch. With investor confidence shaken and credit tight, junior miners are finding it difficult to raise funds for exploration programs.

Mining companies both small and large are suffering in the current global economic slow down, as stock markets in Asia, Europe, South America and North America have been in a nose dive. And while investors try and figure out which financial institution will be the next to collapse, or which large cap will follow the likes of Enron, some in the investment community are making out like bandits buying up blue-chip stocks at huge discounts. Lost in the shuffle have been the small-caps, which do not have the name recognition of their larger counterparts. The junior mining industry has been particularly hard hit, as their operation funds dry up and their share price plunge.

The reality is that mining exploration is expensive, and small companies require regular, large cash influxes in order to conduct their business. This is often done in the form of equity financing with financial institutions, funds or individual investors. But with global credit is at a standstill, the ability of a small firm to raise funds in this market has been near impossible. Unlike many small firms in other economic sectors, very few junior mining stocks have any form of cash flow upon which to rely. And with many junior miners suffering depressed share prices, many companies have been forced to give up large portions of equity for minimal financing.

The TSX Venture index, which is heavily weighted towards junior mining stocks, has been on a downward plunge since early July of this year. As the global economic crisis continues to illustrate increased volatility, investors have shown a lack of trust in small companies which fail to generate cash. The impact has been substantial on the mining sector, with many junior mining stocks having to revert to survival mode, not growth. Ultimately, this means that companies must conserve whatever cash reserves they currently have and reduce operations to an absolute minimum until the economic storm has passed and investor confidence in restored. The wait could be longer than many expect.

While larger mining companies will likely be able to utilize their substantial asset base or production numbers to borrow funds when credit finally become more liquid, junior mining stocks will likely have to wait until there is a resumption in investor confidence. Without the ability to raise funds, there will be limited exploration, and without exploration there will be limited interest by investors. Even exploration mining companies with substantial cash reserves are being forced to scale back, as the wait for the market to turn around may take longer than their reserves can withstand.

The bottom line is that while there are many junior mining stocks that are sitting on substantial deposits, investors need to understand that the current economic environment makes this market very risky. That is not to say that this is not a prime opportunity to invest in a sound junior miner; it simply means that the process of due diligence is now more vital than ever.