Mining Indaba ’16: We’ve yet to hit rock bottom, says Baker & McKenzie

By IM Staff
Published: Thursday, 11 February 2016

Mining industry observers have been calling a floor in the market for the last three years, but the law firm thinks the sector might have another 18 months of pain before conditions start to improve for resources.

The mining cycle has not yet reached its lowest point, because there have been too few company failures and consolidations to halt the decline, according to lawyers at legal firm, Baker & McKenzie.

 Mining in Kailo_Julien Harnels, via Flickr
Projects that lack substance will need to drop out of the market to restore balance and free up financing for more solid operations, say Baker & McKenzie (source: Julien Harnels, via Flickr). 

Speaking to IM at the Mining Indaba Conference in Cape Town, South Africa, Greg McNab, a partner at the firm said that there are still too many projects that are not substantial enough to survive.

"I think we should still see at least 25% of juniors [on the Toronto Stock Exchange] consolidate or shelve projects," he said, noting that the downward trend in mining financing had further to fall. "We’re not there yet."

Either consumption must increase or marginal projects should not come online at all for balance to prevail in the market, said Richard Blunt, a London-based partner at Baker & McKenzie.

The law firm said that it is currently dealing with a flood of requests for restructuring advice, as companies expect to start defaulting on covenants and finance arrangements – a clear sign that the mining sector is set to face further financial troubles

"I give it another 12-18 months before we see the bottom," said Blunt.

Securing funding is proving to be a major headache for many mining businesses, especially juniors.

The partners suggested the only place willing to offer finance in the present disinterested investment environment are very expensive private equity houses. Even here, a company has to have good quality assets in order to secure any kind of financial backing.

Mining companies are also facing more regulatory requirements, which is putting pressure on cash outgoings at a time when budgets are shrinking.

One example of this are tighter conflict minerals reporting requirements – legislation put in place by the US and the EU to ensure that profits made from mining casserite (tin), columbite tantalite (tantalum), gold and wolframite (tungsten)  are not being used to fund wars in unstable regions.

There is a possibility that these or similar regulations could be extended to other minerals in future, particularly as supply chains come under increased scrutiny for environmental as well as human rights reasons.

Shifting political objectives, particularly in Africa, which are facilitating a trend towards resource nationalisation could also put strain on the already tight finances of mining companies.

Law firms like Baker & McKenzie can offer restructuring advice and business rescue plans to miners, at a cost, but many believe that the industry needs to be purged of its weaker participants altogether.

"Nobody wants to be the one who gives ground, as that may be letting their competitors in," one attendee at this year’s Mining Indaba told IM. "The problem is, this strategy means running a company into the ground before giving up, to a point where nobody will want to buy or revive it in the future."

They added that one recent "positive" trend has been the decision by some companies to delist, saving on the administrative expenses incurred through stock exchange listings – opting instead to conserve cash and lie quiet.

"These companies might find themselves in a better position to get going again once the cycle picks up," the source added.

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