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