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Mining services - mind the funding gap: Equity raising options - EY - Global

Mining services: mind the funding gap

Equity raising options

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Public equity raising options, for a number of players in the mining services industry, is constrained due to the prevailing equity market volatility and equity dilution concerns.

The source of future equity raisings remains uncertain. Equity markets remain constrained, and not the preferred option of existing shareholders suffering lower valuations.

There is a large retail and management contingent, on the share registers of many listed mining services companies, which may not have the capacity or appetite to fund future equity raisings.

Larger mining services companies are better placed to raise additional equity, as well as debt if not highly leveraged. A protracted slowdown in capex will mean significant funding pressure for the relatively higher geared end of the sector.

Alternative equity funding options, in conjunction with a revision of overall funding strategy, are looming for a number of the listed players in the sector.

Ownership structure (total group)

Ownership structure (total group)

Factors affecting mining services

  • Labor and skill shortages adding to pressure to pay higher wages, to attract and retain workers.
  • Increases in costs of purchases including fuel, chemicals, explosives, repairs and replacement parts for mining equipment.
  • Scrutiny on costs is resulting in increased competitive pressure on the mining services sector:
    • Rising tender disclosure requirements
    • EPCM’s need to demonstrate they are adding value
    • Miners passing on cost pressure to contractors
    • Traditional construction/builders pursuing mining construction sector contracts due to weak demand in urban areas
    • Competition from overseas players

Working capital subject to increasing volatility

With increased volatility and competitive pressure in an environment with a strong, but volatile, growth outlook, the mining services sector is looking to strengthen cash flows and balance sheets.

Working capital is impacted by the negotiating strength and type of contract, and generally exhibit lumpy cash flows linked to milestone achievements.

The revenue profile for the mining services companies is generally linked to sub-contractor terms. Project costs often have to be carried for extended period whilst claims and variations are approved/disputed.

We have recently seen an increase in large project awards to smaller players, with insufficient working capital facilities.

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