Financing mining in testing times: a view from the buy-side

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.

During the resource-sector’s 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.

Since 2008, 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 self-finance projects.

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 market.

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 afloat.

M&A: an alternative route to fundraising

At a 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 market.

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 start-ups.

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.

Good 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 said.

Australian mining funds head overseas

The Bloomberg 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 (AMEC).

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 America.

"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 53%.

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 business.

"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.

Signs 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 week.

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 uncertainty.

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 relieved.

"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 open.

"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 investors.

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