Small mining companies seeking for cash sources
22-Aug-2012 El Mercurio – News
After commodities prices drop they are looking for financing:
Small mining companies seeking for cash sources
Many of them are running out the money they gathered in capital markets
A group of small and mid-size mining companies is facing a global cash-flow crisis while raw materials costs drop and investors and banks become more exacting when deciding how and where to invest.
Though lesser-known than heavy-weighted large-size mining companies such as Río Tinto PLC and BHP Billiton PLC, these small-size mining companies are key players in mining supply chain.
Many of them are small exploration traders with low or none real production activity. However, larger companies have used them for a long time as testing devices that are purchased when they announce an important finding. Many others do have real production activities that may altogether affect global offer and demand.
These small-size mining companies have enjoyed an increase of their market capitalization during the almost 10-year lasting commodities peak. But now many of them are running out of the money they gathered in capital markets and are struggling to obtain new funds to finance their operations as a result of basic goods prices drop.
Last year, South African small coal mine Miranda Minerals Holdings Ltd. was forced to freeze securities issuance with preemption rights due to the weak demand from investors. Recently it completed a new offer and obtained about US$817,000 to cover costs during the forthcoming months. Miranda, however, will need more financing this year, Andrew Johnson, the company CEO, states. “We are in a precarious, unstable condition”, he recognizes.
Bonds markets are getting harder and harder to get money from. Mid-size capitalization mining companies HudBay Minerals Inc., Toronto, and Coeur d’Alene Mines Corp., Idaho, started to promote debt issuance. However, both companies called plans off due to market weakness.
Reluctant investors
With some metals having prices a third down the levels they reached in second quarter of 2011, investors are reluctant to inject money. Mining costs, however, have not so deeply dropped as raw materials prices, thus making pressure over cash flow and frightening investors who are willing to get profits.
This year mining companies have collected US$10,400 million in global capital markets, lower than a third of what they collected in same period last year and a fourth of 2009 levels, as Dealogic data provider states.
S&P/TSX Diversified Metals and Mining Index a group of mid-size capitalization mining companies follow, has reduced almost 50% from 2011 to date. A valuation drop makes it hard to collect money because companies must sell their shares for less money. The situation also discourages companies to issue bonds.
If companies cannot obtain funds, they may become forced to leave their exploration projects or even stop their mines. Some analysts are afraid the severe drop of exploration works of the 90’s may be repeated. Financing drought also drives experts to foretell consolidation ventures of small and mid-size mining companies.
“If they do not get funds during next months, some of them will have to consider alternatives whether by bankruptcy protection measures or by consolidating with other companies”, Gilbert Chan, President of Nai Interactive Ltd., asserts.
Some larger mines and with more cash availability have already started to envisage opportunities.
“We observe those small-size mining companies that are having a bad time, needing funds but with a strong operating partner”, Andy Davidson says, Director of Investors Relations and Business Development of Centamin PLC, a mining company with headquarters in London that is focused on gold extraction in Egypt. “Many opportunities exist right now”. In the middle of restrictions, mining companies are exploring new financing methods. A method that is becoming quite popular is the “streaming” by which a company offers a portion of future production for advance cash.
Private sale of stocks to a large-size investor is also common, but in those cases terms are mostly defined by investor, sources close to mining companies state.
