Cost and execution challenges have created a very different environment in the sector over the last year and, as a consequence, far more risk-averse shareholders for mining companies. These new investors are more tuned in to changes in market conditions and less comfortable with longer-term returns — a mindset that’s challenging all mining companies’ ability to grow and stay alive.
The global mining and metals capital strike has hit junior miners the hardest. Risk-averse investors have left very few options for early-stage explorers. Equity markets are also very limited to juniors, and it’s even more difficult to find other financing sources. That’s why exploration stage companies exposed to current capital constraints are pursuing unique, creative financing arrangements and thinking about how they can advance to the next stage in their growth agenda.
These companies must be realistic in their projections about financing needs. Those that identify smaller funding requirements, linked to achievable, phased development targets, are more likely to attract investors. Promoting strong teams and track records can also provide a competitive advantage; investors are on the look-out for familiar names and those with a history of success. More and more majors are also paying attention to juniors with high quality assets and teams to build their project pipelines.
Consolidation between juniors with cash and those with property, mergers of equals, and streaming deals that sell off a royalty interest from a non-strategic asset for up-front financing are also sources of capital up for consideration in the year ahead. It’s all about diversifying sources and types of funding to spread risk, drive efficiency, and limit exposure or loss of control to any one single party. Juniors that build relationships with the widest range of potential capital providers will secure the right funding at the right price more easily.
Capital optimization is at the top of the boardroom agenda for the majors on the other end of the spectrum. These companies’ shareholders have become increasingly frustrated by weakening share prices and lower profitability in the face of huge planned capital spending. Majors are now facing increased pressure to rethink capital allocation decisions and reduce capital expenditures.
Some of these allocation decisions include recycling capital through ongoing appraisal of portfolios, redistribution and diversion of capital from higher cost to higher return projects, and divesting non-core assets. Companies at this stage are well on their way to a new chapter of price-moderated margin growth as they try to balance the desire to build and maximize shareholder returns.
What next? The capital strike by many companies and investors alike will continue until commodity prices recover sufficiently to encourage new investment in the sector — a shift expected in the latter half of the year when companies welcome back leaner business models and stronger balance sheets. It’s then that companies will re-focus on growth as the pressure to replace depleting reserves and maintain production mounts.