Hundreds of mining companies still face financial conditions that threaten their existence, says consultants Grant Thornton in a new report.
Nearly one third of junior miners need to raise additional funds within six months, and just under 60% would need to top up cash within a year, according to a survey among 250 mining executives conducted for the report.
10% of juniors “don’t know” if they need more money; probably a sign that they do.
The situation is not as dire for larger companies but even then 35% of major miners – listed firms with a market cap of more than $500m or private companies with 500-plus workers – anticipate a need to change their capital structure within one year
“It is an untenable situation for many mining companies, and one that has plagued the industry since the summer of 2010,” said Jeremy Jagt, mining leader for Grant Thornton Canada.
“We would ideally like to see junior miners holding sufficient funds to support their operations for a year or more. When they don’t, they gradually enter into a capital “Catch 22” – weakened to the point where they cannot sustain sufficient operations or keep projects moving to generate cashflow, but also unable to source affordable funding because they’re not producing cashflow and/or moving their projects forward. They struggle to get out of that cycle.”
Grant Thornton expects mergers and acquisitions in the sector to double this year compared to 2013, but “for some mining companies, a rise in M&A and market upturn may come too late. One in 10 junior miners are likely to go into administration, and 16% are likely to halt operations temporarily, according to the advisory firm’s survey.
35% juniors are likely to acquire the 32% of majors expected to pick up other competitors or a unit of another company by the end of 2014. Similarly, 36% juniors and 27% majors expect to be sold or undergo a partial sale.
“This matchmaking balance between buyers and sellers underscores the likelihood of substantial M&A. But there are probably more junior opportunities out there than there are willing and capable buyers, which will lead to choosy acquirers,” the study notes.
Not all large companies are on the acquisition trail however. 38% of executives at majors say their company’s primary strategy is to manage fewer core commodities, and 27% will focus on fewer countries of operation.
What may also spur mining M&A is that private equity firms are sitting on approximately $8 billion of unspent cash. “Some private equity firms are taking a fresh view – they are willing to acquire mining talent and expertise to operate, rather than looking for a quick profit and exit,” notes Chris Smith, mining leader, Grant Thornton UK.
Image by Courtesy Arctic Star Exploration Corp.
5 Comments
Ricardo Damm
Junior mining Companies have created and hosted a monster situation along the last decade. Whereas the CEOs, CFOs and COOs (most of them) should have been managing the cash of the Companies as if they were the owners or investors, looking for efficiency, low prices, lean salaries, the history has shown the opposite. What most of them want is power, subordinates below them, friends to hire and salaries and bonuses. No private equity will drain the money of their associates in these useless structures.
Dany Superfish
Dear Frik Els
Could you please tell me who are the private equity firms that are taking a fresh view?
I am a supplier of mining companies in Peru and looking for long-term investors to expand my operations.
[email protected]
David Haarmeyer
The global mining industry is undergoing a fundamental transformation as rapidly changing supply and demand dynamics are overturning existing structures and are putting a premium on private equity’s hallmarks: investor-management alignment, long-term investment horizon, and capital discipline. BerchWood Partners recently released this report to highlight the private equity opportunity — Global Mining: Private Equity’s Next Frontier? (also found at their website).
Paul
The blood is only just beginning to flow, How many juniors are about to commission their first plant, designed and built on the back of $1500 Gold ?. Then there are all those companies now trading below 1c with over 500M shares issued ~ they have no hope of raising any substantial funds without major restructuring. Unbalanced Boards who do not see the big picture and stupid investors who do not understand the industry are being lead like lambs to the slaughter by self serving promoters.
Asha Pandey
It will continue for some more time.