Financing still a challenge for junior miners

By Laura Syrett
Published: Friday, 27 February 2015

Stubbornly low mineral prices and virtual paralysis in spending in the mining sector means juniors are likely to have little to live on until commodities demand recovers, Laura Syrett, Acting Editor, finds.

Consensus analysis of the global commodities market puts minerals and metals prices at five-year lows in the first quarter of 2015 and capital for development projects continues to prove elusive as a result.

In these conditions, junior miners at the feasibility stages of their projects are being forced to focus heavily on costs and adjust their economics according to more bearish price forecasts.

John Woods, African mining leader at global accountancy firm Deloitte, says that mining companies are working to start from a low cost base from which they will have an opportunity to expand in due course.

"The strategy is to have low cost positions and to develop pipelines of growth which create more low-cost opportunities," Woods said in a research note published in February.

He also noted that companies with more than one asset for either the same mineral or a number of different commodities are looking at slimming down.

"In an environment with expectations for softening commodity prices, all mining companies are going to look at their portfolios. When they look to sell an asset, they must do it within a strategy and consider the value for shareholders," he said.

For companies in production, selling an operating asset with a track record of cash flow is difficult enough when the returns look set to diminish in line with selling prices and buyers are likely to drive hard bargains. For juniors, it might be even harder to offload projects.

"Mid-tier and major companies should be looking to buy juniors but there is not a very good precedent for this in the industry. Big companies tend to take each other over, partly because of valuation fears," Charles Gibson, director and sector head for mining at Edison Investment Research told IM.

He said that the present climate of fear has been exacerbated for what have come to be regarded as bad deals in the mining industry in the past. "What was wrong with the deals done during the boom years was not that they did the deals, but that they paid the wrong price," Gibson said.

When asked whether junior companies are overvalued, which may be putting off M&A activity, Gibson was sceptical. 

"Are juniors overvalued? Not if they’re trading at below their cost of discovery," he said, but added: "If they expect to be bought out at a significant premium, then this is a fair point."

Discipline or do little?

Gibson thinks it is unlikely that the lack of M&A activity in the mining sector is down to a drive for prudence when it comes to spending. "At some point, this mantra for discipline actually starts to look like a cover for doing nothing," he said.

"Saying that juniors are overvalued sounds like another excuse made by larger companies for sitting on their hands; maybe through fear, or experience, of having paid the wrong price in the past."

Gibson said that juniors with feasibility or scoping studies in hand are more attractive to potential buyers than early stage exploration companies, but notes that if buyers are looking for construction-ready projects, they are shrinking their pool of potential targets and will have to pay higher prices.

Unlike many industry observers, Gibson is optimistic about the survival of junior mining companies through the present downcycle. 

"Juniors are incredibly tenacious – they don’t tend to drop out of the market but usually go into a state of hibernation. If funding conditions remain difficult I expect to see more go into hibernation," he said.

As for the chances of securing new funding for mining projects, commentators have mixed feelings.

To re-engage with the financial sector, the mining industry has been told it needs to overcome reputational barriers that have lately deterred investors from putting money into it – the most important of which is price fluctuation.

"There is a lot of tiredness over the volatility of prices between 2008 and 2011 (…), this is even greater than the fear of price weakness," Michael Widmer, metals strategist at Bank of America Merrill Lynch, said at the Mining Indaba 2015 conference in Cape Town in February.

He also suggested that the industry needed to shift its price expectations for inventories of minerals and metals and adjust to new, more bearish norms.

Richard Blunt, a partner specialising in M&A and project development at mining law firm Baker & McKenzie told IM  that new funding was starting to come into the mining sector at large, principally from trading houses, private and 'quasi-private’ equity, but that there remains very little in the way of M&A activity.

International law firm Berwin Leighton Paisner (BLP) released a report in February revealing that over $2bn of private equity funds was injected into mining projects during 2014. 

Following previous calculations in February 2014 reporting that $8bn had been raised by private equity funds for mining projects, BLP’s report highlights that there is still significant scope for further investment in a market that is starting to build momentum.