“Global uncertainty is driving volatility in the equity markets to a degree not seen since the 2008 global financial crisis. Despite this, mining and metals companies are learning to live with uncertainty, balance sheets are stronger and companies are positioned to seize opportunities, albeit with more caution than witnessed during the peak of 2007.”Lee Downham
Global Mining and Metals Transactions Leader
Ernst & Young, UK
By the end of the second half of 2011, the mining and metals sector had successfully ridden the storm of global economic uncertainty, emerging financially stronger and poised for growth.
Balance sheets are stronger, with many companies faced with the challenging but positive decision of how best to utilize their capital - the dilemma of buy, build or return is back on many boardroom tables.
Financial strength of the mining and metals sector
Despite their recent fall, 2011 commodity prices were up on 2010, driving an improvement in earnings and cash positions. This cash, together with the buoyant corporate debt market, was the primary source of funding for the majors.
As a result, we saw the junior and mid-tier companies take up a greater share of secondary equity funds during 2011, a trend we expect to continue into 2012.
Bulks and metals price performance (2010–2011)
During the second half of 2011, equity markets were increasingly turbulent and as a result alternative funding sources emerged, a trend that will continue in 2012. Funding provided by private wealth, the majors, state-owned enterprises and sovereign wealth funds, in return for strategic holdings and/or for off-take, have all offered a broader range of financing options.
The further opening up of bond markets during 2011 provided access to capital to support the growth ambitions of both the majors and the sector’s mid-tiers. Total proceeds from bond offerings reached $84b, an increase of 16% on 2010. This increase was driven by companies taking advantage of tightening credit spreads and overall strong demand for access to comparatively cheap debt.
High yield bond issues dominated during the first half of 2011, but contracted during the latter half of the year as sovereign debt concerns continued to go unresolved across Europe and the US. Conversely, investor appetite for high grade issues remained buoyant throughout 2011, highlighting the importance of maintaining an investment grade credit rating. This will help to underpin the capital allocation decisions of boards in the year ahead.
During 2011, loan proceeds increased marginally by 2%, with companies borrowing or re-financing over $187b of debt, primarily to lock-in favorable rates compared to existing debt and extend tenor in order to provide greater financing agility. While loan proceeds increased, gearing across the majors, and to a lesser extent the mid-tiers, is at an all time low. Leverage has been tamed and balance sheets are far stronger than they were going into the global financial crisis in 2008. The average gearing levels across a sample of majors had decreased to just 12% at June 2011 compared with 69% at December 20081.
As a result, we do not expect to see a significant equity call from the majors during 2012, even in the event of weakening global economic conditions. This leaves a greater proportion of equity available to the juniors and mid- tier mining companies.
1Gearing based on net debt/shareholders’ equity for a representative sample of companies. Please refer to Ernst & Young’s previously published reports, “Wall of debt” and “Life after debt” for further information.
The data is primarily sourced from ThomsonONE.com. This data has been supplemented with IHS Herold, Capital IQ, Mergermarket and Factiva.