The commodity price meltdown plus bankers' tightening their purse strings equals a shortage of funds for deserving development projects.
The scenario is not new. Anytime commodity prices cycle downward, exploration and development is postponed. The problem becomes one of meeting demand when the cycle again rises. Suddenly there are markets for minerals, but new production is often years away.
What's a company to do?
They will have to find more inventive ways of financing development, Ernst & Young global mining director Dr. Tim Williams, told Mining Weekly Online during an interview at the Terrappin African Mining Congress in Johannesburg.
“There are many routes to raise capital, but the one route that people are not talking about now is the actual floating of the individual mines, and raising the cash for their development as equity,” he told the reporter. He recalled that this mechanism had been successfully used in the past to fund 40 or 50 individual projects.
Williams went on to point out that borrowing from banks to fund mine projects arose only recently, in the past 20 years or so. The frantic pace of mergers and acquisitions between 2006 and 2008 left major mining companies with "quite astonishing and really staggering" levels of debt. Ernst & Young’s calculations found that the 60 biggest companies raised $75-billion each year in debt in 2007 and 2008, and most of that debt went into buying other companies.
Some companies have resorted to floating bond issues to raise money, but in Williams's opinion that is only a short-term solution. That funding option will dry up, too.
Let's consider that Williams is onto a good idea. An investor could buy into a single new high-grade copper mine poised to come on-stream as demand increases rather than a larger company that might be running out of reserves. Similarly, if an investor thought demand for diamonds was not going to recover, he or she would avoid buying part of a diamond project. The knowledgeable financier would have the option of selecting a single promising project rather than stock in a company producing multiple commodities, some of which might adversely affect the bottom line.
Floating equity offerings for individual projects is an old idea, one that perhaps deserves to be dusted off and modernized. It could be the best way to ensure that deserving new projects reach production in time to meet the next increase in demand.