FRASER INSTITUTE MINING 2008/2009 SURVEY Miners anticipate wave of bankruptcies as more explorers forced out of business The newly released 2008/2009 Fraser Institute Annual Survey of Mining Companies finds some miners believe the current industry shake-out will be good for mining.Author: Dorothy KosichPosted: Friday , 27 Feb 2009 RENO, NV - The annual Fraser Institute survey released Thursday found many in the mining industry expect a large number of bankruptcies with some believing that more than half the exploration companies will be forced out of business. More than half the respondents believe that exploration and development activities of junior explorers will decline "a great deal," while nearly 85% say the activities of production companies will be curtailed. Nevertheless, more than 70% of miners believe that commodity prices will resume an upward trend as the economy recovers, a quarter believe prices will be stable, and less than five percent of miners believe the downward trend in prices will continue over the long term. "In other words, despite past history, miners believe that the current drop in commodity prices is the exception-increasing prices will be the rule." The Fraser Institute noted, "Overall, our respondents indicated that they spent US$3.4 billion on investment in 2008 compared with US$3.02 billion in 2007. Finally, it remains true that ‘all that glitters is gold.' We asked which mineral represents the greatest proportion of each company's budget: 38.71% of those responding to this question indicated it was gold. No other metal came close." The highest scorer on the Fraser Institute's policy potential index (PPI)-which measures the overall policy attractiveness of 71 jurisdictions in the survey-was Quebec, which also topped the list in both 2007 and 2008. Wyoming experienced a dramatic improvement, leaping from 22hd place to the number two spot this year, while Nevada ranked third on the list. Seven Canadian provinces remain in the top 10: Quebec (1), Alberta (4), Newfoundland and Labrador (5), New Brunswick (6), Manitoba (8), Saskatchewan (9), and Ontario (10). The bottom 10 rankings are Venezuela, Ecuador, Guatemala, Honduras, India, Bolivia, Zimbabwe, Kyrgyzstan, the Democratic Republic of the Congo, and Indonesia. "Unfortunately," survey coordinator Fred McMahon said, "these are all developing nations which most need the new jobs and increased prosperity that mining can produce." However, the survey discovered some good news from Latin American as Colombia showed "significant improvement this year," leaping 10 positions from 56th place last year to the 46th spot in the current survey. "The improved score might be a result of the mining community's increased confidence in the country due to its improved political stability and security-and to the mining community catching up with this news." The survey said Chile showed "stellar results," producing world-leading scores," and has been in the top 10 of the list for years. The Fraser Institute has been conducting the mining and exploration company survey since 1997. Nevertheless, the survey noted Latin America overall continues to show the most decline of all regions. "In fact, five of the bottom scorers overall are from Latin America." The survey also highlighted a number of comments from both explorationists and miners concerning various international mining regimes. For instance, an exploration company vice president said, "Indonesia stands out in my experience as a country that has lost its way in the management of its natural resources. They are being exploited in many cases in a way that is dependent on draft rather than a legislative framework." A junior mining company producer wrote, "I find Mexico a wonderful place to do business and operate a mine. Has been one pleasant surprise after another. "The vice president of another producer with more than $50 million in revenue said, "In Venezuela, if you build it, Hugo Chavez will steal it. Ecuador is a close second for similar reasons along with tribal claims." An exploration company vice president declared," In Argentina we are two years into a 90-day process for drilling permits, with the latest impasse total legal nonsense." The president of another exploration company called Botswana "the shining star of government and lack of corruption in Africa!" An exploration company manager described West African countries as favorable for mining with "exploration policies promoting exploration, political stability, respects of the rules by government, justice in place, people welcome foreign investment." A manager for a producer company with more than US$50 million in revenue, said security of tenure in Zambia "is severely threatened by new legislation and the uneven way in which it is implemented. Government has no capacity to administer complex new legislation." An exploration manager declared, "DR Congo has no rules; corruption has no limit; no justice in place; labor law is not favorable; skills are limited, re-negotiation of contract is regular," while the president of a mining company with more than $50 million revenue asked, "Zimbabwe-would anyone go there?" The respondents also commented on the current global economic crisis: "Once again we hit the boom-bust cycle, despite everybody's best estimates, mining is stuck in a roughly 10-year bust cycle... "Unfortunately, governments, finance institutions, and major mining houses are to blame for short-term range investments into metal cycles. Commodities will continue to gain once the cycle bottoms out but short term pricing issues combined with a lack of ready finance will weigh heaviest on the junior mining sector who haven't the cash reserves to support loss-making production and we will see quite a few corporate failures over the coming months," said a junior mining company president. Another junior producer president remarked," Commodity prices have been ludicrously high in recent years and are now returning to something resembling sanity." One exploration company vice president warned, "Investors, particularly for nano-cap speculative investments, such as juniors, may never return to the market. The industry should prepare itself for a ‘paradigm shift' in how exploration is funded." "I cannot understand why exploration/producing companies with cash in the bank and a profit every quarter are tumbling along with ‘fly by night' junior exploration companies. Reminds me of semiconductor manufacturers and high-tech engineering companies suffering because of the dot-com bust," a geologist commented. An exploration company COO and director noted, "In some ways the current market conditions (major undervaluation of most companies) is a good thing, as it will sort the wheat from the chaff. Many companies have filed to capitalize on the last few years' boom (by either banking money or finding a great project which will help them survive). The majors are most guilty n this regard. In boom times, they publicize the fact they make massive quarterly profits, prompting governments worldwide to dust off old investment laws and look at ways of getting a slice of that pie for free. Then they fritter the money way so when times change they have to lay off all their geologists." A manager in a producer company with more than $50 million revenue, remarked, "There was a need for clean up to happen in the insane exploration and investment world. The problem is that even the great companies are paying for that today." "The current investment climate is one of mass panic as investors sell everything they can sell to generate cash," an exploration company president said. "As evidence, many companies are trading 20% to 50% below cash on hand with no value given to projects and properties." A consulting company manager noted, "Risk as been re-calibrated and small exploration companies have simply been pulled up by this metric. [Some companies] are the zombies with no funds, no hope of raising funds, and whatever bank balance is left there for the survival of the directors. These are clearly not sustainable businesses and probably never were. Here is a definition of sustainability: the company survives over one or more full commodity cycle." "No mining means: Think of yourself standing in a field in the rain and snow with no heat, no electricity, no watch on your arm, no filling in your teeth, God help us-no cell phone to call for help," an exploration company COO quipped.