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.