Market Disruptions

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Almost every company has project timelines on its PowerPoint presentation. A key underlying assumption is that money will be readily available from investors when needed. The last 20 years, however, have driven home the point that money is rarely available when needed, and companies have developed horrible cash management skills.

Junior mining companies tend to go from being flush with cash to flat-out broke every nine to twelve months. If they end up broke when the market is down, the shareholders get wiped out. In 2009, bad projects died and good projects diluted themselves 60-70% to stay alive, and in the current market slowdown, cashless companies are paying through the nose for new money raised.

Most junior companies have project setbacks for years due to a lack of money at crucial times. The management is forced to make a decision between putting projects on hold and undertaking expensive dilutive financings at record-low share prices to push projects forward. All companies have development schedules; if you delay a project, you run the risk of killing it, so companies do the desperate thing and take cash at bad times.

If a company can afford to, it should always have $5-7 million in reserves for when the market turns. Currently we’re either in fall-of-2008 déjà vu or a shorter period of market instability. Oren Inc.’s view is we’re about to hit a double dip recession in the US and Western Europe. If we have another fall-of-2008 scenario, companies with cash will be fine and companies needing to cash up this fall will be in trouble.

The financing market has been dead since the tsunami washed over Bay Street on March 13 (see the Oreninc Canadian Resource Financing Index). The question is whether the S&P re-rating will bring a second tsunami and further convince investors to stuff lumpy gold under their mattresses.

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