The mining downturn has seen operators carry out severe belt tightening across the board, some even extending their payment periods in an effort to control costs.
These decisions are leaving suppliers and contractors scrambling to fill their new, yet ever widening, gaping financial hole.
Despite Rio Tinto dropping its proposed doubling of payment terms from 45 to 90 days, workers, suppliers, and contractors in the sector are still affected by lengthy payment times, increasing the need for more secure financing plans.
According to Dun & Bradstreet’s Trade Payment Analysis in 2014, the mining and utilities industries have the slowest payment times; the former taking an average of 56 days and the latter 55 days. Under state law, construction contracts have to be paid within 50 days however the resources industry has exemptions.
Rio’s initial proposal came in an effort to free up their cash flow and resolve account invoices following the company’s 2015 net loss of US$866 million, and plummeting commodity prices. The 90-day policy was intended for suppliers with contracts over $3 million, while those with less than $3 million expected to wait 60 days.
It came on the back of Rio’s prior extension of its payment schedule from 30 to 45 days last June.
As pressure from governments and suppliers mounted, including the lobbying of PM Malcolm Turnbull during his visit to the Pilbara, Rio abandoned its policy, retaining its normal term of 45 days. A spokesperson from Rio Tinto said, “The decision to ask our suppliers to share some of the burden has not been taken lightly and we have endeavoured to reduce the impact where we can.”
However, it still means that suppliers will have to wait up to 76 days for payment after receiving an invoice.
For suppliers, long payment times creates a delay in reimbursement for goods and services they have already given, creating a burden for those with short term bills such as leases and wages. It also creates a huge problem for small businesses who cannot afford the long waiting times for payment.
BHP Billiton was in a similar position last year, altering their bill payments from 30 to 60 days. At the time, CEO of Australian Trucking Association Christopher Melham outlined the major issues this presented in the trucking industry.
“Operators that agree to extended payment terms still need to pay their own creditors on their existing cycles – for example, this could include 21 day payments to fuel suppliers, 30 day payments to small owner-driver subcontractors, and weekly or fortnightly payroll payments,” he said.
While banks are the first option for lending, they are more reluctant to back the resources sector due to its potentially volatile nature.
Macquarie Group incurred a $363 million bad debt charge in the six months leading up to March 2015 due to mines and related developments being affected by cost blowouts and delays. In response, CEO Nicholas Moore said, “[It’s] the combination of what happens if you have a project that’s delayed, a project that runs over budget, your hedging effectively runs off at that time and at the same time commodity prices are falling.”
“We are continuing to support the resources sector…just in terms of where the cycle is at the moment, there isn’t a lot of opportunities to lend into new mines.”
Goldman Sachs identified that direct exposure to the mining industry by the big four banks is less than 1.5 per cent of total exposure at default. A higher credit exposure, the total sum of credit given to borrowers, is extended to companies that maintain higher credit ratings.
InvoiceX, a recently established Australian loan company, has unveiled a new invoicing scheme to help struggling mining companies overcome the new challenges created by long payment terms. This comes following this year’s likely liquidation of Queensland nickel and Arrium’s voluntary administration.
As banks are more likely to offer loans for land and real estate rather than liquid assets often incurred by mining, director of InvoiceX Dermot Crean questioned their motives.
“What is the intent here? To put them [workers] out of business?” he asked, pointing to Rio’s now redacted decision.
The company, which distinguishes itself from other peer to peer lending groups and consider themselves a market planner, has implemented a system, backed by private investors and the director’s own funding, that gives companies financial assistance upfront to fill the looming invoice gaps.
This funding ensures payment of workers despite creditor difficulties. The average repayment period was 51 days and with the company, repayments are offered between 30 and 90 days. A three per cent interest rate is given for 30 days and 10 per cent for 90 days.
Another director of InvoiceX, Steve Yannarakis, said that all companies have this issue, “cashflow is a problem worldwide.”
One of the main points both directors stressed about their company is their emphasis on transparency, with their website providing an anonymous list of business dealings.
Started only four years ago, the directors said they are the only company in Australia to offer this position. It comes as a substitute to the commonly used factoring system, which involved books sent to a third party however all invoices were disclosed with their stamp all over it, creating a signal to investors and the market that the company may be in decline