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, 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 delegates.

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 added.

Taking off: Australia-listed rare earths explorer Greenland Minerals and Energy closed an oversubscribed $15m capital raising for the development of its Kvanefjeld 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-sector’s 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.

“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 attractive

Despite the bearish environment, figures recently released from some of the world’s 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, PKF’s 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 report said.

“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 PKF’s 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 head overseas

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 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 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 added.

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 country’s 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 recovery

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 markets.

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.

Window of opportunity

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 2012