The credit crunch is back for miners - but unlike the 2008 version, major companies have the cash to develop large-scale projects and vulnerable smaller ones are more creative in finding funding, and keeping supply disruptions to a minimum.
Small and mid-sized companies with projects in the exploration phase or at an early stage of development typically have the greatest difficulty securing cash in a downturn, when banks build up their capital buffers to defend against a deteriorating economic environment. The IPO market also tends to dry up, closing another potential avenue for some.
The credit crunch in 2008 has caused residual problems for metals such as copper, when mine projects, counted on to help ease chronic supply tightness, were deferred or shelved.
That lack of supply is still being felt today.
“Right now I think the smaller projects, earlier stage projects are going to go begging for funding for the most part,” said Edmundo J. Gamas, partner at First American Capital Partners, LLC, a boutique investment bank operating offering services in industries including mining and energy.
“But a lot of mid-sized and smaller projects that have their geology in order are fundable. They will just have to take a different route, and, not necessarily a worse route, such as private bond placements or going directly to institutional investors.”
Other options include offtake deals, share issues, strategic partners such as mining majors or Chinese and Indian firms, although they will cherry pick.
Offtake deals, or deals to purchase output, are sometimes done in advance of production, allowing commodity traders like Glencore or major consumers like Tata Power to secure supply, often at a particular price, in exchange for pre-financing to help the project get to production.
Some solutions might come at a cost - sometimes giving up a slice of a promising project to secure the cash needed to realise its potential.
“You may take the best offer on the table at the time but that may put you down a path where you are giving away a lot more of the company than you would normally do,” said Debbie Thomas, UK head of Metals and Mining at Deloitte, on strategic partnerships.
Delays could be critical Fresh delays in developing sufficient new mines could prove critical for some markets. Funding woes may also go with uncertain demand prospects, meaning the time when projects are needed could be pushed out if the European crisis begins to seriously dampen demand elsewhere, particularly in Asia.
“The difficulty now is that because it is coupled with what is looking like a fairly serious possible double-dip recession in the UK and Europe,” said Edward Lukins, partner at law firm Morrison and Foerster in London. “Is the demand going to be there to keep the prices of commodities up?”
“You are relying on Asia more than anything else. In 2008 it wasn’t looking quite so bad,” added Lukins, who has worked on a number of exploration financing/mining deals.
Demand for minerals and metals is expected to remain strong over the medium term though, underpinned by China and emerging economies.
This could spell trouble for supplies of minerals such as iron ore, used to make key infrastructure material steel, unless projects are committed soon. But short term expectations of lower iron ore prices are deterring investment in those mines.
“Bankers are more reluctant to lend money to iron ore miners because no doubt there is sentiment that the iron ore price will fall quite low, said Paul Marsden, technical sales and marketing director at junior miner Nordic Iron Ore, stressing that this was his personal view.
Some iron ore companies had sought alternatives, such as a possible project spin-off and bonds to avoid relying on banks, Marsden said.
Fast-growing iron ore miner Ferrous Resources has twice been forced to shelve IPO plans citing tough market conditions. It is now in talks with several parties including BHP Billiton over options including a strategic partnership to develop its huge deposits in Brazil’s “iron quadrangle”.
Innovative Other firms are relying on innovation.
Greenland-focused Angel Mining, with a market value of $13.5 million, is among the smaller miners and exploration companies suffering from the crunch. It runs the Nalunaq gold mine, though the jewel in its crown is the Black Angel lead-zinc mine and surrounding areas.
Finding cash for that high potential but technically challenging project, due to be in production in 2013, is one of the company’s top priorities, but financing has been tough.
It has raised cash with loans, sold shares and even through a standby equity distribution agreement (SEDA), an alternative which allows companies to sell new shares without making a formal offer, which means they can also cancel the move if they need less cash.
But last month it was still one of several to issue a warning to investors in its interim report, telling them there was a risk it would not realise the potential of its assets - even if that is mitigated by other factors.
There is a widespread belief though, based on continued strong demand and historically high prices, that the majority of viable projects across minerals will still see the light of day in a timely fashion - even if the tough markets will push some borderline projects to the wall.
“There are definitely still investors interested in this marketplace so it is really a question of going out there and doing the legwork,” Gamas said.
“If you’re the developer of a project you can’t just wait for the banks to resuscitate their interest in this sector.”