Mines dig deeper for capital

Johannesburg - Mining companies are digging deeper than ever for new capital, favouring equity offerings over bank debt as sources of cash.

An Ernst & Young (E&Y) global survey on the risk factors for the mining industry shows that sourcing capital for the sector has dramatically changed in the past year and that equity, though considerably more expensive than bank loans, has become a much larger source of cash.

Adrian Macartney, South African head of mining and metals at E&Y, said there is a likelihood that mining projects will soon be individually listed, as they were before the major consolidation period in the 1990s. 

Before the global recession in 2008 large mining companies received 61% of their capital in loans, but in the past year the proportion has shrunk to 29%. And whereas successive rights issues produced 17% of the available capital before the slump, that increased to 34% lat year.

This means that capital has become more expensive, since loans are the cheapest source of capital as companies are not taxed on the interest on loans, said Macartney.

Currently the big risk for the mining industry is the allocation of scarce sources of capital. Expectations on the rate of the recovery after the slump, debt ratios and the cost of debt and equity as sources of finance have all dramatically altered in the past year.

The capital structure of mining companies has changed as a result, said Macartney. Before the crisis these companies maintained high debt levels to finance acquisitions, but the perils of high indebtedness became clear during the recession when the usually friendly bankers became less affable.

Over the past year organic growth has become very important at the expense of generic (acquisitive) growth.

Skills shortages have become the second-biggest risk for mining companies, according to the E&Y annual survey, which is conducted among the major mining companies.

Job losses brought about by the recession have already been reabsorbed by the market, especially in Australia, said the E&Y report.

BHP Billiton [JSE:BIL] CEO Marius Kloppers recently said he was surprised at how quickly the skills shortage again raised its head in key areas of the resources sector, such as in the Pilbara iron ore region in Australia.

Access to capital markets is crucial for the mining industry to tackle new projects and expand existing projects, perform exploration and finance negative cash flow.

 - Sake24.com