By Greg Peel

Mining juniors have always suffered from a high cost of funding given the speculative nature of the mining game in a world of volatile commodity prices. Often funding is provided by farming out stakes or entering joint ventures in order to avoid costly debt or dilutive capital raisings. But in these days of rapidly rising costs of operational expenditure (opex) and capital expenditure (capex) for existing and planned mining operations, finding that additional funding becomes even more difficult.

The problem becomes more pronounced when costs continue to rise as commodity prices begin to fall. Were commodity prices to keep falling, as was the case in 2008, then costs would fall too, but right now prices are falling in only some commodities and the enormous scope of expansion plans in the sector nationally and internationally is ensuring cost expectations remain to the upside. If a mining junior is carrying debt and cash begins to burn, servicing that debt becomes problematic, no matter how highly prospective the project.

JP Morgan has retained a Neutral rating on Ivanhoe Australia ((IVA)) after dropping its target price on the stock by 22%, to the market level of $1.40. The broker has dropped its net present valuation of the stock by 42%, following both increases in opex and capex costs at its Merlin molybdenum-rhenium project and the broker's downgrade of its long-term moly price assumption to US$16.92/lb from US$23.77/lb. Spot is currently US$14.30/lb. The internal rate of return on the project, on the broker's calculation, has dropped to 23% from 32%.

The cost issue has forced Ivanhoe to scale back work at its Mt Dore prospect which is still in the pre-feasibility study stage. Continuing progress in the feasibility study at Merlin is a positive, the broker suggests, but the broker remains wary of Ivanhoe's potential funding requirements for the development of major projects. Despite recent share price underperformance, Neutral is as far as the broker is prepared to go at present.

By contrast, UBS is more enamoured with Ivanhoe's copper-gold prospect at Mt Elliot, noting the recent scoping study showed potential for both open pit and underground projects. The broker believes Mt Elliot has the potential to become a cornerstone and "flagship" project for Ivanhoe and add value over time as further testing is completed.

The estimated capex at Mt Elliot is $95m. JP Morgan notes capex at Merlin has risen to $377m before any change to the contractor mining fleet. Prospects look great, but can Ivanhoe hang on in the face of rising costs and falling prices?

Citi this week retained a Buy rating on Mirabela Nickel ((MBN)), but with the caveat of "High Risk".

The reason why Mirabela has become more risky a prospect relates to the company's Santa Rita nickel project, the project's large debt burden, and the recent fall in nickel prices. The price fall means the company is now struggling to make cash as it faces down a US$60m capex budget and dwindling cash reserves.

UBS has dropped its target for Mirabela by 20% to $1.20, albeit the stock is trading at 50c. Clearly the market is ascribing a deep discount to the broker's net present valuation, but the broker sees little chance of a change in sentiment in the near term given "near term solvency is dependent upon either an improvement in underlying markets or an injection of funds". Mirabela had US$61m of cash sitting on the balance sheet at the end of 2011 but it is carrying US$395m worth of debt in the form of 8.75% bonds due in 2018, along with a US$50m working capital facility secured in January. In 12 months the spot price of nickel has fallen to US$8/lb from US$12/lb. There was a brief bounce from US$8 in December to near US$10 in February, but we're back at US$8 again.

In order to prevent cash burn, Mirabela needs to relieve itself of its debt burden, which to the broker means selling an equity stake in Santa Rita to a strategic buyer. The buyer would need to be prepared to "look through" current nickel price weakness, the broker notes, but a sale would stand the company in a much improved stead. About US$100m would be a reasonable minimum cash injection, which would mean selling about a 10-20% interest, the broker suggests.

Another saviour could come in the form of a corporate suitor of course. Mirabela boasts large reserves, long mine life and an open register. The broker doubts, however, any potential acquirer would have a more bullish than the broker's valuation based on cost and commodity price forecasts (noting the broker's target is 140% above the current trading price).

It's not just the junior miners who are suffering from rising costs and falling prices. The US natural gas price has fallen below US$2/MMbtu for the first time in about a decade but the great US shale race goes on, forcing up opex and capex costs. It's a long term project, but right now BHP Billiton's ((BHP)) US shale investment is not looking so crash hot.

BHP, however, is enormous, has no debt to speak of and is a cash generating machine though its sales of iron ore, coal, oil, copper and other materials besides. BHP can cope, and is backing its long term vision. Australia's mining juniors do not have the same luxury and traditionally fly close to the wind at the mercy of commodity prices. Many did not survive 2008. We are not back in 2008 by any stretch, but there is no sign of cost inflation abating, nor the Aussie dollar falling significantly for that matter.

Investors looking through rose tinted glasses of valuable reserves and long term Chinese growth need to keep the short term liquidity issues of mining in mind.