Securing financing in the mining
sector is a much harder task than it was four years ago,
delegates heard at a mining conference held in London at the
end of September.
Financing the Mining Industry in
Challenging Times - an event organised by Bloomberg
Industries - saw analysts, bankers and miners discussing
the difficulties faced by mining companies attempting to secure
financing in a fearful market.
Many small caps and junior miners
are 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,
Jonathan Stephens, RBC Capital Markets managing director, told
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, he added.
When acquisitions are necessary,
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, Stephens said.
This is likely to drive more
M&A deals between mining firms in the near term as capital
for greenfield development remains difficult to secure, he
Good management vital for investor
| Taking off: Australia-listed rare earths
Greenland Minerals and Energy closed an
$15m capital raising for the development of its
rare earths property (pictured) early in October.
(Source: Greenland Minerals and Energy)
Mining companies must focus on risk
mitigation and good management to secure investor backing,
Catherine Raw, director and project manager at the UK-based
asset management firm BlackRock, told delegates.
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.
During the resource-sectors
bull-market prior to 2008, financial decisions for miners meant
deciding on capital structures to manage healthy streams of
operational cash flow.
But since 2008, the
environment has been distinctly bearish, she said.
Many firms have found it impossible
to secure sufficient external funding, due to restricted access
to all types of finance - from initial public offerings (IPOs)
to refinancing facilities - as the global financial crisis
persists, Raw outlined.
Raw added that some miners are
over-promising 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
share price, Raw said. Continual dilution of shares
will only put people off owning them.
On a more positive note, Raw
concluded 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 should concentrate
on optimising their underlying project and engineering
capabilities, rather than focusing solely on their share
price, she said.
London stock market remains
Despite the bearish environment,
figures recently released from some of the worlds major
financial markets suggest that investor sentiment is turning in
favour of the resource sector.
Mining companies continue to view
the Alternative Investment Market (AIM) of the London Stock
Exchange as a desirable market on which to seek a listing
despite challenging financial conditions, according to recent
analysis produced by PKF Accountants.
The number of AIM-listed mining
companies increased in the year to 30 June 2012 for the first
time since the financial crash of 2008, PKFs Extracting
Insights report revealed when it was published in October.
However, it noted that market
conditions remain difficult, as evidenced by the fact that both
IPO and secondary fundraisings were substantially lower during
the period than in the preceding 12 months.
IPOs raised aggregate funds of
£33m ($53m) with secondary issues raising a further
£594m ($954m) in the year to 30 June 2012, the report
states. This compares with £220m ($353m) and
£1,858m ($2,984m)* in the previous 12-month period.
The aggregate market capitalisation
(total value of tradeable shares) of AIM-listed mining
companies approximately halved between 1 July 2011 and 30 June
2012, the report added.
This reduction was driven not only
by falling share values, but also by the fact that some of the
largest AIM miners left the market during the year with the new
entrants replacing them having much lower market caps, the
Whilst the level of secondary
fundraising is down on the previous 12 months, the amounts
raised are still substantial in the context of difficult market
conditions, Jeff Harris, co-head of PKFs Natural
Resources team, said.
It is also encouraging to
note that the picture started to improve in July and August,
with five new mining companies joining AIM in those two months
alone and valuations showing signs of stabilising in both
absolute and relative terms, Harris added.
That said, significant
obstacles remain - mining companies will face a real challenge
to raise the funds they need to continue with development
plans, against a backdrop of continuing uncertainty and slowing
economic growth, he cautioned.
Australian mining funds
The amount of funding available for
new mining projects in Australia has largely dried up as
financiers rein-back investment in the resource sector,
according to the Association of Mining and Exploration
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 overseas, principally
towards Africa, Mongolia and South America.
Clearly, more ASX raised
funds are heading overseas than are 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
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%, Bennison said.
Pointing to the countrys
mining and carbon taxes 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.
Canada shows signs of
Canada-based mining firms are
experiencing a thaw in what has been a year-long freeze on
equity financings for new projects in the country,
Reuters reported in October.
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 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 corresponding period a year earlier.
Mining stocks have now started to
rebound after falling more than 40% during the past 12 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
A flurry of financings are expected
in the coming months as pent-up demand from mining juniors is
finally relieved, Tyler Swan, managing director in equity
capital markets at CIBC, told Reuters.
There is a large pipeline
(...) of companies looking to come to market before the end of
the year, he said.
Industry commentators have warned
that there is no guarantee the window for financings will
remain open, however.
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.
Companies that move quickly will
benefit, given lingering uncertainty and caution among many
investors, Steinberg said.
Mining companies should also be
mindful that economic shocks are inevitable, Nolan Watson,
Sandstorm Gold Ltd CEO, said.
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, he added.
*Conversions made October