“The Exchange should have enforced its own rules and delisted the hundreds of juniors that don’t meet the listing requirements.”

My acquaintance (let’s call him Tom) whom I hadn’t seen for about ten years barely sat down at the table before he blurted out that statement, as if he couldn’t wait to get it out of his mind. This is completely unexpected. It was Day 3 at the recent PDAC Conference where our firm, Sattva Capital had a booth and the day, like many other days before it, would bring lots of surprises and interesting tidbits of news and projects from various corners of the world.

“If they are late with filing their financial statements, then the securities commission will cease-trade them,” I replied. In each of the past couple of years, dozens of them were delisted this way. Audit costs for a junior can range from $20,000 – $40,000 a year, a sum that many can no longer afford.

When prodded for further clarifications, Tom mentioned a TSX rule requiring a company to have at least $50,000 in working capital. He believes the hundreds of juniors with substantial negative working capital are effectively zombies. They make the industry look bad and slow down the recovery.
We chatted for another five minutes about this topic. It’s a well-known fact that if a publicly-listed junior cannot pay the Exchange the monthly listing fee, it will be delisted.
Over the last few years, a large number of juniors have survived by rolling back their stock and then drip-feeding themselves with small private placements: $100,000 here. $300,000 there.

It’s not unusual anymore to find juniors with several million dollars in negative working capital.

The fact they are still around is a testimony to the resilience and optimism that are the common traits of the many people who populate this industry.

Here in Vancouver, the epicentre of global exploration where projects are hatched and money raised, the British Columbia Securities Commission is diligent at cease-trading any listed company that fails to file its audited financial statements on time. I know that because every year in the last few years, from April to May, dozens of them met their doom this way. Their demise is duly announced by Stockwatch on its website.

As my friend left our booth, I wondered what prompted Tom to bring up this topic. For a European geologist living in Brazil, it could indeed appear strange that hundreds of companies with substantial negative working capital can still strut their stuff at the conference.

Back at the hotel room that evening, I found the answers. The Financial Post had run an article on this subject that very same day. “Zombies companies need to be purged from TSXV: expert” blared one headline. The article mentions that there are about 600 juniors with about $2 billion in negative working capital and quoted an expert as saying that the TMX Group which owns the Exchange has a vested interest in letting these “zombies” last as long as they can pay their listing fees.

Does it really matter that hundreds of these “zombies” refuse to throw in the towel? How much longer will they last? What are the implications for the industry’s recovery?

For an answer, we just to have to turn to nature.

Using the forest metaphor, the industry is the forest and the juniors are the trees and the undergrowth. During the boom years, the brokerage firms churned out an average of one to three juniors every week. These companies had on average three directors who were already involved in other companies. The sole listing requirement was a property that has had $100,000 spent on it. All it takes to be a public company was sponsorship from a brokerage firm that agreed to raise anywhere from half a million dollars to a few million dollars for it.

These are what the letter writer John Kaiser recently referred to as “pretend companies that the brokerage industry polluted the system within the past decade.” Although lacking quality management, many of these were churned through the system like a sausage factory, in the process, diverting precious capital from the more serious projects.

A forest fire is often very destructive. Yet at the same time, it is also essential to the health and future growth of the forest. Without an occasional bout of destruction, a forest can grow dense and thick with undergrowth, preventing new trees from sprouting and ultimately creating conditions for an even bigger fire in the future.
Starting in 2011, a fire has been spreading through the industry. The big question here is: When will it burn itself out?

It may seem counter-intuitive, but the more furious the fire, and the greater the destruction, the faster is the recovery of the forest.

Despite seemingly devastating destruction, a burned forest never dies. The seeds of the recovery lie buried under the ashes, awaiting favourable conditions before sending shoots of growth.

But the current fire affecting junior mining is more akin to a slow burn. Since the fire is of the smouldering type, it still has a few years to go before exhausting itself. As such, conditions for a rapid recovery are not yet in place. The 600 or so “zombies” mentioned in the study will eventually die at some point sometime between now and the next 48 months. But because theirs is a slow, agonizing death, emotionally and financially wrenching for those involved, it will keep the more promising projects from reaching their full potential sooner.

Just as a forest never dies, the projects currently held by the “zombies” don’t disappear either. They simply revert back to their original owners. And from there, they will find their way to a better company where hopefully their potential will be realized sooner.

There’s nothing on the horizon that would suggest a rapid recovery. If there’s a recovery, it would start at the top and then filter down. The big producers at the top of the food chain are still recovering from a massive hangover of lousy acquisitions made at the top of the cycle. Think Barrick Gold’s U.S. $7.3 billion cash purchase of Lumwana copper mine a few years ago that is now virtually written off. Unfortunately, Barrick is not alone.

The juniors are on their own now for the next few years. The era of the survival of the fittest has begun.