Selective financing to snag pace of mine development

By Laura Syrett
Published: Friday, 31 October 2014

Macro indicators spell a gloomy year ahead for miners in 2015, while those which have successfully secured deals to bring projects into production this year say that they have beaten the odds, but only with a great deal of effort and patience.

The global mining industry will see fewer projects brought online and those that are will be developed at a slower pace as resource financing continues to become tighter and more selective.

Major miners, juniors and service companies are suffering from a lack
of funding (source: Vale).
Falling prices for metals and minerals have slowed their descent this year but show few signs of a turnaround in the wake of faltering demand from China, causing miners and financiers to pull back on funding commitments for new production capacity.

"The boom in China seems to have, at the very least, paused, acquisitions done by many Chinese companies have been questioned and few mining projects are being funded beyond the next two to three years," Ken Hoffman, global head of metals and mining at Bloomberg Intelligence, said at an industry meeting in London last week.

"Potential sharp shifts in demand along with equally strong supply reactions could lead to market gyrations," he added.

Headline indicators of these shifts have tended to focus on steel demand and the attendant impact on iron ore prices.

At the beginning of October, the World Steel Association (worldsteel) told a conference in Moscow that global steel consumption is likely to grow at a slower pace than previously forecast for 2014 and 2015, with growth now pegged at 2% for this year and the next, down from estimates of 3.8% and 3.3%, respectively.

"The positive momentum in global steel demand seen in the second half of 2013 abated in 2014, with weaker than expected performance in the emerging and developing economies," Hans Jurgen Kerkhoff, worldsteel’s committee chairman told the conference, singling out structural chain in China as a key driver of the decline.

Iron ore prices, meanwhile, have hit five-year lows in 2014 and weakness has also been observed in many industrial minerals prices, taking a toll on project financing.

Notable postponements to mining projects this year include BHP Billiton’s decision to push back its 10m tpa Jansen potash project in Saskatchewan, Canada, until 2020, while Rio Tinto has gone all but silent on its Jadar lithium-borates project in Serbia and has put rutile and zircon processing operations in South Africa on care and maintenance in response to weak demand.

In the junior mining industry, Canadian lithium and iodine junior RB Energy Inc. recently shut down operations at its Quebec lithium project in Canada after it failed to secure the funding needed to maintain operations and has since announced it will delist from the TSX-V after its stock price collapsed.

Elsewhere, a number of graphite and rare earths projects tipped to come online by 2015 appear to have stalled completely owing to a lack of funding.

One Canada-based former analyst who recently moved into the exploration industry told IM that some juniors missed their chance to secure funding.

"Many were too greedy when the money was on the table and thought they could do better," he said.

"The problem is that they find themselves unable to get any funding, now that market feeling gone sour," he added.

The lucky few

While the general picture is one of gloom for junior miners in particular, the industry has not been without its success stories.

Manoli Yannaghas, managing director of UK-listed StratMin Global Resources Plc., which recently signed an offtake agreement for graphite produced at is Madagascan mine, told IM that his company was both relieved and delighted to have secured a buyer in a market where such deals are few and far between.

"Binding offtakes like this aren’t easy to get," he said. "They’re not like MoU’s [memoranda of understanding] – there aren’t many of them around and it has taken a lot of time and hard work to get this far," he said.

StratMin has agreed to sell all the graphite grading over 94% C it can produce from its Loharano flake graphite mine to an undisclosed buyer for five years, with prices agreed six months in advance on a rolling basis to take account of market fluctuations.

Canada-based vanadium miner Largo Resources Ltd has likewise recently began supplying its offtake partner, Swiss trading giant Glencore, with material from its Maracas mine in Brazil.

Mark Brennan, CEO of Largo Resources, said that his company’s offtake deal was also hard won.

"There is money out there for good projects, but you really have to be best of breed to secure it," he said.

Brennan, who was an investment banker for 10 years prior to joining Largo, explained that the Maracas mine had suffered a number of funding setbacks on its path to development as a result of turmoil in the financial markets.

"It’s been tough for miners on the TSX lately, but demand hasn’t gone away – it’s still there, just not as strong as it was," he said.

He described the present funding drought for mining as "a period of indigestion", but conceded that there are probably "too many projects" around, given that the industry is facing a different economic environment now to that of the last decade.

Capex cuts slice deep into mining services

The squeeze on funding for mining companies has been sending ripples through the wider industry, particularly in the mining services sector which is struggling to cope with the downturn in orders.

Finnish processing group Outotec this week reported a loss of €3.1m ($3.9m*) for the third quarter of 2014, down from a net profit of €43m for the same period a year ago, and announced that it would axe 100 staff in an effort to cut costs.

"Uncertainties in the global economy, weak metal prices performance, as well as mining and metals companies’ pursuit for minimising capex and opex costs kept investments on a low level and put pressures on the service market," Pertti Korhonen, Outotec's CEO, said in a statement accompanying the results.

Another telling recent development has been the news that Rio Tinto has offered its incumbent CEO, Sam Walsh, an open-ended contract to remain in the job – a significant move given that Walsh was brought in on a mandate of cutting costs at the Anglo-Australian miner, and had been due to leave the job at the end of 2015.

A more positive perspective came earlier this month from equipment supplier, Caterpillar Inc., which reported a surprise increase in third quarter earnings to $1.02bn from $946m a year ago and has forecast sales of $55bn for 2014.

The Peoria, Illinois, US-based company said that the gains were thanks largely to cost savings achieved through restructuring, but added that it was cautiously optimistic about its growth prospects, even though uncertainties over structural reform in China and continuing unrest in Africa, the Middle East and the former Soviet Union continue to cause concern.

Services companies have said that while they are pursuing stronger margins through cuts, industry fundamentals, including mineral prices, need to improve for organic growth to be realised.

*Conversion made October 2014

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