By Venkie Shantaram, Group Business Development Director, Aggreko
Access to capital is frequently cited as one of the biggest issues facing the mining industry. It was one of the main discussion topics at this year’s INDABA conference and is a focus for industry research.
Global financial consultants EY cite capital access and allocation as proof of the differing fortunes of the mining industry’s major producers and its juniors in 2014.[1] As the fortunes of industry majors have stabilised, its juniors have been left struggling to survive.
Rocketing exploration and production costs have impacted profit margins and left investors reticent to engage with new projects, especially with smaller companies. Juniors, who lack the war chests of the major companies, are struggling to raise the necessary capital to invest in increasingly expensive mining practices.
Depleted natural resources have forced companies to seek new, more disparate frontiers of exploration. As these boundaries are pushed, mining companies have to meet an increasing proportion of the infrastructure costs. Traditionally, governments have invested in infrastructure to support a mine. Disparate locations and a lack of certainty of return on investment, combined with weak economic circumstances have left governments unwilling to invest as they once did. The nature of mining infrastructure has become a commercial decision, not a community one.
One of the consequences of the trend outlined above is an increasing appetite across industry generally for renting large equipment – a trend which Aggreko has benefited from.
Rental power brings a number of financial advantages and provides a reliable alternative to permanent energy infrastructure. The regular payments (which cover refueling, staff and maintenance) are beneficial to accountants and financiers as it aids the planning of expenditure and cash flow. This is attractive to investors as well: it enables a high level of transparency in company finances and mitigates the risk of mass capital outlay.
Equally, rental solutions do not come with the hidden surprises of owning equipment – refueling or emergency repairs can cause financial panic and cause a project to come to a standstill. With a rental contract, there will always be a back-up generator on site to ensure no downtime.
Cost and capital management remains one of the biggest issues facing the mining sector today. Flexible finance has become an increasingly popular solution and it enables mining juniors to continue to push the barriers of exploration. Nervous investors and a lack of access to capital has meant numerous high-profile projects being scrapped, shelved or sent back to the drawing board.