Securing financing in the mining sector is a much
harder task than it was four years ago.
As the multinational professional services firm
PricewaterhouseCoopers has remarked, the scale of change in the
outlook for capital-raising for established and junior miners
alike has been huge.
|Tight financing: external funding has been
to come by for miners since summer 2008.
During the resource-sectors bull-market
prior to 2008, financial decisions for miners meant deciding on
the right capital structures to manage healthy streams of
operational cash flow, and industry bottlenecks were among the
chief barriers to bringing new supply online.
the environment has been distinctly bearish. Characterised by
restricted access to all types of finance from initial
public offerings (IPOs) to refinancing facilities as the
global financial crisis persists, many firms have found it
impossible to secure sufficient external funding.
In addition, as lower mineral prices have significantly reduced
operational cash flows, miners have found themselves unable to
Equity financings are the lifeblood junior mining
companies, which rely on them to fund start-up and early
operating costs of new projects before the mines begin to
generate revenue from selling their minerals into the
Major mining companies, on the other hand, must continually
invest in order to stand still.
Miners need financing as a buffer against uncertainty. But,
when economic uncertainty paralyses markets, resource
developers are often starved of the capital needed to stay
M&A: an alternative route to
recent event in London, entitled Financing the Mining
Industry in Challenging Times organised by Bloomberg Industries,
analysts, bankers and miners discussed the difficulties faced
by miners when attempting to secure financing in a fearful
Jonathan Stephens, managing director at RBC
Capital Markets, told delegates that many small caps and junior
miners were looking to mergers and acquisitions (M&A) as a
way of gaining funding and creating more relevant
companies in an industry crowded with competitive
He added that a great deal of M&A had been
held up during the 2011-2012 period as firms struggled to
justify acquisitions when capital was in short supply, and
chose to divert funds to existing assets.
When acquisitions are necessary, Stephens said,
escalating start-up expenditure means that it is often more
cost-effective for mining companies to buy operating mines than
to begin projects from scratch.
This, he said, is likely to drive more M&A
deals between mining firms in the in the near-term as capital
for Greenfield development remains in short supply.
management is vital
Catherine Raw, director and project manager at the
UK-based asset management firm BlackRock, told delegates that
mining companies must focus on
risk mitigation and good management.
The nature of valuing the mining sector is
attempting to predict the future, something that has become
increasingly difficult in an [economically] uncertain
world, Raw said. Companies must risk-adjust, then
risk-adjust again to stay safe, she added.
Raw also remarked that some miners are
overpromising and under-delivering from their operations.
Companies are doing themselves a disservice [when it
comes to securing financing] by only quoting cash-costs when
they should be quoting all-in costs, she said.
Quoting selective information makes
investors nervous, she added.
[Companies] must also look at what seeking
alternative modes of financing will do to their
shareprice, Raw said. Continual dilution of shares
will only put people off owning them.
Raw concluded on a positive note by saying that
the potential for value appreciation of mining assets over time
was huge, and that financiers should not be deterred from
backing well-managed, well-staffed mining companies.
Companies should concentrate on optimising
their underlying project and engineering capabilities, rather
than focusing solely on their share price, she
Australian mining funds head
Industries event provided a lens for what have been
testing financial circumstances for mining projects across the
globe since 2008.
In Australia, the amount of funding available for new mining
projects has largely dried up as financiers rein-back
investment in the resource sector.
What money companies do have is being spent overseas, according
to the Association of Mining and Exploration Companies
Speaking at the AMEC Convention in Perth at the beginning of
September, AMEC CEO Simon Bennison said the bulk of mining
funding raised on the Australian Stock Exchange (ASX) was now
being directed towards Africa, Mongolia, and South
"Clearly, more ASX raised funds are heading overseas than being
spent in Australia," he said.
"The amount of drilling on new deposits has flat-lined in
recent years and the greenfields spend is now half of that of
brownfields exploration," he added.
Bennison said AMEC was concerned that junior companies were
picking up the slack of resources giants, with the share of
greenfields exploration in Australia rising from 36% to
Marking the mining tax and carbon tax as contributing to market
uncertainty, Bennison called on the government to work harder
to make Australia a more attractive place to do
"There needs to be an exploration tax credit scheme to make
Australia internationally competitive and to streamline
regulatory approvals and of course AMEC favours the
removal of the carbon tax and MRRT [Minerals Resource Rent
Tax]," he said.
of recovery in Canada
In the northern hemisphere,
Canada-based mining firms are seeing a thaw in what has
been a year-long freeze on equity financings for new projects
in the country, Reuters reported last
Over the past
year, the stream of bought deals a type of equity
financing commonly used by junior mining companies in Canada
slowed to a crawl as the Eurozone debt crisis and a
recoiling of emerging economies increased market
According to the financial services firm Oreninc,only about Candian
dollar (C$) 400m ($410.3m) was raised through fewer than 30
bought deals in the spring and summer of 2012, compared with
roughly C$2bn ($2.05bn)* raised via 80 deals during the same
period a year earlier.
Mining stocks have now started to rebound after falling more
than 40% over the past twelve months, indicating a brighter
financial outlook for the industry.
The S&P Toronto Stock Exchange (TSX) Metals & Mining
Index has also risen more than 25% since July, spurring some
juniors to re-enter the equity markets.
Tyler Swan, managing director in equity capital markets at
CIBC, told Reuters
he expects a flurry of financings in the coming months as
pent-up demand from mining juniors is finally
"There is a large pipeline (...) of companies looking to come
to market before the end of the year," he said.
Window of opportunity
Although the recent movement in the Canadian mining sector is
being hailed by optimists as a return to investor positivity in
mining, analysts and law firms have cautioned that there is no
guarantee the window for financings will remain
"A lot of people are optimistic and are hoping the window will
extend for some time, but I think markets are still fairly
volatile," Richard Steinberg, head of securities, mergers and
acquisitions at the Toronto law firm Fasken Martineau told Reuters.
Steinberg believes companies that move quickly will benefit,
given lingering uncertainty and caution among many
Nolan Watson, CEO of Sandstorm Gold Ltd, said mining companies
should also be mindful that economic shocks are inevitable. "It
could be one month away or six months away, it just depends on
when the next macro problem crops up globally, whether it be
Spain, or Greece, or Italy, or the US fiscal cliff."
*Conversions made October 2012