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Metals Exploration Bankruptcies

By Elliot M. Smith and Andrew M. Simon
May 01, 2016

The past several years have not been kind to commodities exploration companies. The price of gold dropped to $1,051/oz. in November 2015, a level that had not been seen since 2009. Although the price of gold rebounded somewhat in January and February of this year to just over $1,200/oz., the price has steadily decreased after peaking at $1,921/oz. in August 2011. The price of silver has also decreased dramatically, with its price off 60% from its 2011 highs. Copper has not escaped this trend, and was recently selling for just over half of its 2011 price.

The difficult pricing environment has taken a toll on exploration companies. These companies often require large capital investments to cover the significant costs of mineral rights acquisitions, heavy equipment purchases and leases, securities regulatory compliance, environmental compliance and mine development expenses. When borrowings are underwritten in a strong commodities pricing environment, as was the case during the bull market that ended in 2011, prolonged price decreases can make it difficult to service that debt. Also, many exploration companies' potential revenues are largely speculative because they have no operating cash flows. Weak metals prices can derail such companies' long term strategies, which often rely on partnering with established production companies or selling proven properties.

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