Money’s almost too tight to mention
Chris Cann in London, 15 December 2011
DESPITE a fall in lending levels and the cancellation of an unprecedented number of IPOs, keynote speakers at Mines & Money in London last week said that money was still available for good companies able to communicate their investment case and prepared to spend the necessary time on the financing process.
Lending in 2011 was down, and 30% of whatever funding was available was soaked up by four major mining houses indicating that lending for juniors was sparse. This is hardly surprising given that banks have wound back their risk appetites, increased the cost of borrowings and pulled back to sectors and geographies they trust.
Equity at first glance appeared to fare better with levels similar to those of 2010, but Glencore’s £60 billion listing has distorted those numbers. More telling were the 250 IPOs across sectors that have been cancelled so far in the current quarter alone, with mining hopefuls making up their fair share of that figure.
On a brighter note, there were companies that proved that not only was debt funding available for mine development, but it was available on good terms. Discovery Metals got its Boseto project in Botswana financed at a better rate than most London mortgages, while First Quantum, Base Metals, and Sandfire Resources also secured funding for mining developments. Vedanta, Vietnam National Coal and Wiggins Island meanwhile borrowed serious money for major bulk commodity infrastructure.
There was also a silver lining in equity markets as emerging market stories continued to find their way onto traditional markets – Russians Polymetal and Evraz’s recent listings in London spring to mind immediately. And though stock markets are scary places for miners right now, the sector is still outperforming other industries.
So while funding is not the doddle it was prior 2008, or even compared to late 2009-early last year, it is out there.
The main problem has been that European banks in particular, which have been a historical source of finance for junior explorers and miners, have rolled back on risk and are currently in danger of collapse. This situation is true to a lesser extent of other banks around the world.
However, funding has been partially subsidised by increasing activity amongst marginal sources and new entrants to the mining sector. These include sovereign wealth funds and private equity groups, while hedge funds have taken a more active role and the issuance of corporate bonds by the majors, often at lower rates than many European government bonds, have been a major feature.
The leverage of off-take deals to provide funding has become more prominent, as has the use of large, end-user joint venture agreements for the same purpose.
The key for companies looking for debt, according to Standard Bank metals and mining director Vaughan Wickins, is to understand what sources are available and to plan properly. He suggested that a strong team of advisers was crucial for securing debt finance at the moment, and urged companies to use conservative forecasts in their project economics that properly consider the risks.
“A well-planned financing strategy and coordinated execution – that’s the key to a successful financing,” Wickins said. “A realistic timeframe for execution can be outlined by clearly defining the tasks involved and the scope of work for each of the players.
“These tasks include the independent technical consultant’s review, the various lenders’ credit committee and review processes, and fallback financing options being outlined as well as solutions to address cost overrun. Miners would have to be crazier than the March Hare to believe that 10% is an adequate contingency.
“And finally, regardless of the funding solution, there is simply no way around the inherent risks of funding and developing a mine. The risks need to be identified at an early stage and will always need to be mitigated.”
He said getting your hands on some cash was easier for companies playing with certain commodities – gold, copper and bulks in general are favoured at the moment – but any good story should be successful if it followed those basics.
The situation in stock markets is more volatile, though many of the principles applied to attracting debt are true for equity raisings, with the emphasis on communicating the story and its risks accurately.
PricewaterhouseCoopers partner Jason Burkitt said companies were often guilty of not being clear with their strategy and the risks involved.
“What I’ve seen in a lot of presentations that companies put together is that they could do a lot better in telling their story, and telling it how it is,” he said. “Existing listed companies often complain about being undervalued and that people don’t understand the strategy – but the strategy is often not very clear and the risks are not very well understood.
“This applies equally in developing the proposition for an IPO-stage raising. For example, looking at the external drivers, understanding the market context, knowing what the situation is like today, what it’s going to be in the future and how you plan to take advantage of that. How does your strategy link to that and why are you playing that particular space in the value chain? What are you trying to achieve in detail?
“If you can’t explain and set that out for investors, value will not be attributed.”
The key message for companies looking to enter the market through an IPO was to take the necessary time to prepare the story. Burkitt said companies with several assets need not put them all forward in a prospectus and would be better served by deciding which assets provided the best mix for the company strategy, risk management, early cash flow potential, and simplicity of the story.
He also said that picking the market – London, Hong Kong, Toronto, Australia – on which to list should be done after the asset group and strategy had been concluded because these different markets are more accepting and supportive of different stories. Hong Kong, for example, is familiar with debt and so would be accepting of a highly leveraged company but has less understanding of mining in general so would be less supportive of the nuances of an exploration play.
Burkitt said he had previously advised companies that there was a set timeline to have a story ready for market, but these days it was best to prepare as early as possible so the story was ready to go when the market was ready to support it.
In answering the question of whether mining finance is available, the answer would have to be: yes. But is it readily available? Not unless you’re on your game.
Also in the December 15 - 21, 2011 edition
- AFRICA
- Eritrea risk narrows Zara field
- ASIA DESK
- Not all good as gold in China
- AUSTMINE
- MST buys Nixon Communications
- BREAKING NEWS
- Abenab progress for Avonlea
- Alara advances
- Alcoa declares divi
- Alcyone search boost
- Better news for St Barb
- Black Fire complies
- Bu Dun Hua copper
- Chief sees higher rating for Endeavour
- Cockatoo extension
- Impala sacks drillers
- Industrea win
- Kingston shines
- Maiden Rosie resource
- More Bass trouble
- More concerns on uranium supply
- Nany option exercised
- Newcrest output up
- Palito reassessment
- Pegasus finds copper
- PGM output up
- Radar on track
- Redhill expands holding
- Rio in control
- River attraction for Silver Lake
- Southern Cross ready to move forward
- Stonehenge sets sights high
- Straits gain
- Strategic permit
- Tanoyan update for Reliance
- Trafford's exploration boost
- Two Rivers death
- Ventnor copper hits
- WA uranium policy
- West Rand mines to merge
- Windfall at lake
- Winmar attracts investor
- Yellowhead on track
- CENTRAL ASIA
- Can miners really side-step a war?
- COAL
- Mardon's new year wish
- CONSULTING
- Consultants see room to grow in 2012
- Lory leads SKM mining into new growth phase
- CONTRACTING
- Contracting briefs: Redpath, Thiess, Decmil
- FINANCE
- A golden path to Dubbo development
- Copper deficit a fixture for the future
- Kagara opts for safety first
- Terramin view expected to become clearer
- FORUM
- How the JORC and Valmin codes work
- More must buy into JORC discussion
- FROM THE CAPITAL
- Capital management will be key 2012 theme
- GOLD
- Loyal to the cause
- Upside seen despite Teranga downslide
- HEAVY METAL
- Atlas Copco expands mining range
- ISSUES
- State-run miners: best of a bad bunch
- MINING
- Independence gloom unwarranted
- MINING INTELLIGENCE
- 'tis the season (still) to be wary
- MINING IT
- Auto-money changes everything
- Innovation is the new black
- IT notebook: ARANZ Geo, Immersive Technologies
- IT notebook: Devex receives certification
- IT optimists
- Mining IT: 2011 rebooted
- Mining IT: product releases to fill 2012 calendar
- XPAC to lead dynamic software revival
- PEOPLE
- People on the move: Gindalbie Metals, Abcourt Mines, Carbon Energy
- SOUTH AMERICA
- Chili backers like its prospects
- VIEW FROM THE WEST END
- Bitten on the bum by a Black Swan
