Light at the end of the tunnel for junior mining companies, says Ernst & Young
London, 6 December 2011: A turbulent global economy has seen equity financing for the mining industry all but dry up, with a steady decline in the volume of fundraisings as the year has progressed but, according to Ernst & Young, there is light at the end of the tunnel for junior mining companies.
Speaking at the annual Mines and Money conference at the British Design Centre in London today, Lee Downham, Ernst & Young’s global head of mining transactions, said that despite the value of junior follow-on equity fundraisings falling significantly during the year, volumes were actually higher than in 2010.
Mining juniors take majority share of equity financing
Significantly, although the market remains depressed, the majority of funds raised are by junior mining companies rather than the majors. Even once the equity markets loosen, when the wider economy starts to pick up, Downham says this trend is likely to continue.
Downham explains: “An increasingly turbulent economic outlook is causing serious disruption to the equity markets. However, for the first time, even though the value of secondary issues has reduced, the majority is going to the junior end of the market.”
As Majors look to alternative sources of capital
According to Downham this is partly a result of an improvement in the balance sheets of the larger mining companies, who have focussed on reducing their levels of debt over the last three years.
“Companies across the sector learnt some tough lessons during the economic crisis and have since been working hard to improve the agility of their balance sheets. For example, gearing is now at an average of 12% for the major diversified companies, whereas it was around 70% before the crisis.
“However, when the large producers do need additional capital, they are increasingly turning to corporate bonds. We’ve seen some very attractive rates being offered, even on long term maturities. Whilst most of this is at investment grade level, the amount of high yield issues is on the increase, albeit not widely available for companies in the pre-production phase of their lifecycle.”
Ernst & Young says that corporate bonds have raised $80bn in the first 11 months of this year, compared to $67bn in 2010.
Consolidation unlikely to drive a capital call from the Majors
M&A activity in the mining sector also remains depressed, with deal volumes at the lowest level since 2006 albeit at a great value compared to recent years. However, even when the economic outlook improves and deal activity starts to pick up, Downham says that it is unlikely to result in a significant increase in demand for equity from the majors.
“The majors are unwilling to put their balance sheets under financial strain in order to finance a transformational deal whilst the economic outlook remains so uncertain. This is exacerbated by increasing nervousness around valuations, due to the extreme volatility of the markets.”
Concluding, Downham added: “The upside for juniors is that there should be less competition for equity as the large producers simply don’t need it in the absence of major M&A. This is a very different reality from the situation even five years ago.”