The seventh of a ten part series examining the trends that will drive the mining industry in 2016.
7. Starved of finance, miners struggle to survive
Mining is slowly working its way out of the doldrums, but it is far from recovered, and many operators are still struggling in the current climate of depressed prices, with 10 per cent of gold miners and a ‘significant portion’ of coking coal mines running at a loss.
In terms of thermal coal, 80 per cent of US production, 16 per cent of Australian production, and one in five Indonesian operators are considered uneconomical.
Despite this, more than US$60 billion in capital was raised globally by the resources industry in the first quarter of 2016, which is essentially unchanged year on year, but is down by 24 per cent quarter on quarter.
Yet the question must be asked ‘what has this capital been used for?’, as according to PricewaterhouseCoopers, nearly a third of capital expenditure spent by the top 40 major miners since 2010 has been wasted.
As previously mentioned, the 13th annual Mine: PwC study into the largest 40 miners by market cap found the largest collective net loss in the top 40’s history, totalling US$427 billion.
“2015 was a race to the bottom with many new records set by the world’s 40 largest mining companies,” PwC stated.
The report unveiled that of the US$623 billion in capital expenditure invested over the five year period from 2010 to 2015, nearly 32 per cent, or US$199 billion, was booked as impairments.
Deloitte added: “Industry debt burdens have spiralled out of control.”
It went on to state capital is fleeing the sector.
In a recent interview with Ernst & Young, Randall Oliphant, chairman of the World Gold Council and executive chairman of New Gold stated, “True private equity does not take commodity price risk. That’s not the business they’re in”.
“They want a proven business model and they want a strategy. There were so many missed opportunities over the past eight years for companies to sell assets to private equity. We couldn’t get anyone who wanted to sell any assets because it was a bullish market and they wanted the upside. I think we’re getting a lot closer to seeing things happen.”
And this is being driven by the restructure in Australia’s economic base, which is creating a dire picture for future investment.
“The ten year mining boom is over, necessitating structural change in the economy as we redeploy resources away from mining,” BIS Shrapnel chief economist Frank Gelber explained.
He went on to state “we’re only halfway through the fall in mining investment”.
“Investment in coal and iron ore peaked around three years and has fallen; but the extraordinary growth in gas projects maintained the boom until last year.
“The fall in mining investment is a major negative for the economy and still has several years to run,” he said, although Gelber ended on somewhat a positive note, stating rising mining production levels are keeping the economy afloat.
“Two years hence, the fall in mining investment will have troughed and mining production will have plateaued,” Gelber said.
“We can only be thankful that the impact of falling mining investment is being offset by rising mining production.”
NAB’s head of Australian economics Riki Polygenis also believes mining investment still has some ways yet to fall, but believes this fall will be deeper than those experienced to date.
“Following the peak and subsequent decline of commodity prices and Australia’s terms of trade, mining investment has followed suit, steadily declining after peaking in 2012-13,” her NAB Group Economics report states.
“The question remains, how much further does the mining investment downturn have to run, and what have been the broader consequences for the economy?”
According to Polygenis, “our models suggest that mining investment is likely to fall by around 70 per cent from its current level over the next three years – implying that we are currently just over half way down the mining investment ‘cliff’.”
“Given our expectations for economic growth over that period, mining gross fixed capital formation is expected to drop to just 1.25 per cent of GDP, which is toward the lower end of pre-boom historical levels.
“The larger than expected declines in commodity prices from their 2014 levels and the likely prolonged nature of the low-commodity price environment has restricted the number of new projects announced; this suggests that mining investment will fall by more than otherwise would be the case.
“There is likely to be very little upside to mining investment going forward.”
Due to this, companies have turned to alternative financing vehicles, such as offtake-related financings, and royalty structures such as streaming.
“Unfortunately, given the lack of funding sources, miners can’t afford to be too choosy,” Deloitte said.
“Companies are floundering in their efforts to attract risk-averse investors to the industry. Any capital returning to the sector is likely to be commodity-specific, which could potentially favour commodities such as copper, zinc, potash, gold, and uranium.”
Deloitte suggested a number of ways miners could ‘buck the trend’, such as commercialising dormant assets like property holdings or equipment.
It also suggested a focus on debt reduction – a move being carried out by Rio Tinto, Fortescue, and BHP – by buying outstanding notes.
Crowdfunding campaigns were also suggested, Deloitte stating “whilst mining is not likely to be a hot sector of crowdfunding, miners capable of telling a compelling story or coming up with an innovative offering could attract funds through these increasingly popular forums”.