ADDRESSING THE FUNDING GAP IN MINING BANKS ARE RETREATING FROM THE MINING SECTOR, MEANING THAT MANY MINING COMPANIES ARE STRUGGLING TO FIND FINANCE. PAUL MITCHELL, FALCON GROUP’S AUSTRALIA AND NEW ZEALAND REGIONAL HEAD, DISCUSSES THE RISE OF NON-BANK LENDING AS THE NEW GO-TO FUNDING OPTION FOR MINERS.
lack of access to capital is making it increasingly difficult for mining companies to plan for longterm growth while simultaneously meeting short-term financial obligations. This is certainly true for smaller players, although is potentially impacting any miner unable to access the bond market. As a consequence, many mining companies are finding themselves severely cash-strapped and, therefore, unable to meet debt obligations, or to develop new projects. Of course, the most significant driver of this situation is the ongoing and global retrenchment of bank lending. Post-crisis regulations and increased capital requirements continue to make the lending of money from mainstream banks more costly and complex – causing many banks to significantly scale back operations. In Australia, for instance, the ever-increasing pressure on reducing exposure to risk has led to banks – on which mining companies have heavily depended on for injections of cash – to reduce lines of credit, or withdraw from the sector completely.
Luckily, mining companies prepared to look beyond the bank market can still find financing. In particular, the non-bank financing industry is stepping into the breach. Non-bank lenders have a higher tolerance for risk, are more flexible and innovative and – crucially – understand that mining is a cyclical industry that will not stay depressed forever. As such, specialist financiers such as Falcon have adopted an approach that takes a long-term view while recognising the crucial need to plug short-term capital shortages. Non-bank financiers are more agile and freer from the pressures that can weigh down traditional lenders. Not least, the fact they do not take deposits means they are free from the regulatory hurdles of mainstream banks. They are also freer to be
innovative with respect to lending structures and security. What’s more, while banks may be shrinking their global footprints, non-bank lenders are expanding their international networks. So, as Western Australian mining companies look further afield to grow their operations and establish regional headquarters, non-bank lenders will play an increasingly important role – opening doors to new markets, as well as enabling companies to diversify their pool of funding partners. Yet non-bank lenders are not the only alternative to bank lending, far from it. A number of junior mining firms are turning towards private equity funds (PE) to fill the funding gap. According to BMI Research, over the first four months of 2016, 12 deals, with an estimated total deal value of $US2.8 billion, were made by PE funds. Moreover, PE investment is predicted to strongly increase in countries with a strong junior miner presence which, of course, includes Australia.
Structured solutions are also proving popular. Over the past several years, off-take deals are being conducted with increasing frequency between development-stage mining and financing parties looking to invest in projects.
This model is particularly well-suited to smaller mining companies – which are primarily focused on exploration and extraction – as it enables them to secure difficult-to-find upfront capital while the investor has the option to store, or sell, the mine’s future output. Meanwhile, royalty and streaming arrangements provide capital to mining companies in the form of an upfront cash payment in exchange for a percentage of future production or revenues from the mine.
The pressures remain
Such funding models have been filling the gap created by the challenges of raising sufficient traditional equity, debt and project financing. Yet the fundamental drivers of uncertainty in the mining industry remain, meaning such funding flexibility will be key even if bank appetite returns. A weak pricing environment over the past several years has had a negative impact on the cash generation of Australian mining assets. In part, this has been due to the Chinese economy’s rebalancing, and its shift in focus from heavy manufacturing to services. AUSTRALIANMINING
Having once been responsible for approximately 40 per cent of global demand for commodities, it comes as little surprise that a decline in Chinese demand – in a market awash with supply – has resulted in price pressures across the industry. Of course, last year saw something of a fightback. In particular, rising prices for coal – coupled with lower operating costs – helped improve the fortunes of larger mining companies, including Whitehaven Coal, the country’s leading producer. Prices of iron ore, meanwhile, swung between highs of $US83.58 and lows of $US38.30 per tonne – making it increasingly difficult for junior to mid-cap players to stay afloat. While the recent higher prices are, of course, good news for the Australian mining industry overall, expectations of challenging operating and market conditions are set to continue into 2017. And, as with a scarcity of funding also showing no signs of abating, Australian miners will need to seek innovative funding models, so it is just as well such innovation is thriving. AM
Australian Mining - March 2017