Raising capital in times of distress
We’ve all heard the adage “cash is king,” but what can a company do to raise capital when the markets are effectively closed for business? The persistent down-cycle of the past five years has made raising external capital extremely challenging. As such, many companies have looked internally for opportunities to raise capital – including releasing cash through operational initiatives or through divestments.
Operational cash release
Releasing cash from operations goes beyond cutting discretionary spending and reducing head count. Other areas to focus on include: productivity improvements, working capital management and innovation.
One area of recent focus in the mining and metals sector is around releasing cash through working capital management. A recent EY report, Make Working Capital Work For You, notes companies have been focusing on the following to free up cash: w Using supply chain as a source of finance. For example, extending supplier payment terms or looking to implement supply chain finance products.
- Reconfiguring logistics and supply chains to make them leaner and more agile, and allow sharing of spare parts inventory across mining operations.
- Improving planning, buying and inventory management processes.
- Changing asset maintenance strategies to move away from life cycle, to condition or risk-based models.
- Taking a closer look at customer trade terms, order processing and delivery scheduling.
- Reducing work in progress stock piles that have historically been set aside due to grade or quality.
Making working capital work for you instead of against you can dramatically improve liquidity in the short and long term.
In our experience, companies are more likely to achieve working capital improvements when they take an enterprise-led approach combined with a bottom-up change management program focused on the front-line.
Divesting core or non-core assets
Divestment of non-core, or possibly even selling core assets, along with a broader review of portfolio optimization is not new, but it has become an increasing focus across the sector and will continue to be so in the short term.
EY’s recent Global Corporate Divestment Study reveals that successful deals meet three criteria:
- Have a positive impact on the valuation of the remaining company.
- Generate a sale price above expectations.
- Close ahead of timing expectations.
Only 19% of the sellers in the survey met these three criteria. What set them apart? Three things: 1. They planned well in advance for the divestiture; 2. They understood the potential buyer pool and the buyers’ needs; and 3. They communicated the value of the transaction to internal and external stakeholders.
To maximize value companies need to put some rigour around portfolio reviews to determine what projects should be divested either out of necessity or for opportunistic reasons. Once a project is identified as a potential for divestment, assembling the financial information, building the robust value story, understanding structuring options and clearly defining what is being sold will go a long way towards enhancing value and setting the divestment up for success.
It’s true that in times of distress, cash is king – but it’s not always easy to come by. To preserve value, ensure high performing projects are not starved of capital and to shore up liquidity companies need to look internally for opportunities to raise capital. Certain operational initiatives will provide immediate access to cash, while divestitures have longer lead times and require significant planning to achieve optimal results.
Michelle Grant is EY Transaction Advisory Services Leader for Mining & Metals Sector in BC