Darnbrough: How has the market changed for your sector of the industry in the last six months?
Lowder: The market has changed dramatically by the virtual closure of the capital markets.
The inability of junior explorers to raise capital means that it is going to be a case of putting up the shutters for many companies in order to conserve available cash and wait for better times.
Malachite is not as badly affected as some, but there is no doubt that the big change has been the virtual elimination of access to capital. Several junior mining companies have gone into administration in the last few weeks.
Everyone is scared of each other. The banks are unsure of which other banks are stable, so they are hesitant to lend to each other.
People who do have money do not want to lend it out for fear that they may never see it again. It has become very difficult to raise money from any source. Shareholders are shell shocked because share prices have fallen so much. Companies that could issue shares to raise capital do not want to do so because there would be so much dilution.
The usual options for raising capital have dried up.
Darnbrough: What are the major trends and variations in the market that you would expect to see over the next 18 months, and in the longer term?
Lowder: For the next few months I think it will be more of the same. Everyone will remain guarded and suspicious and not want to commit themselves to anything until there emerges a glimmer of hope that suggests there is a better outlook. At the moment, there is pretty much gloom and doom wherever you look and no-one knows exactly when this crisis is going to end. The world financial crisis is very serious for all companies, particularly the companies that need to raise capital. By this time next year things should be starting to improve in Asia and hence in Australia, but the USA has a long road ahead of it.
Darnbrough: What are the key risks for businesses in your sector moving into this period of slowing economic activity?
Lowder: The risk for a mining company in developing a mine is that you might budget and estimate the capital necessary to get the mine up and running, but it may not go according to plan, in fact it rarely does, and you could find that you need more working capital.
When part way through the development process, mining companies can no longer turn around and head back to the market to raise more equity.
Companies have commissioned mines that have cost more than originally intended and the cash flow hasn’t come as quickly as they expected, so they need more working capital until production can meet expectations. The problem is, they can not raise that capital. Companies like Macmin Silver, Matrix Metals and CopperCo have run into problems in recent weeks.
Darnbrough: What actions would you expect from those companies as they move to mitigate potential risks to their business?
Lowder: I think it means a lot of companies that could proceed with development will simply hold off for fear of getting caught without adequate capital midway through the development process. Companies that are in production and have a steady cash flow are not so much at risk, but anything that depends on the availability of capital is likely to be stalled.
Darnbrough: Are there opportunities in an economic climate such as this, and if so, what are they?
Lowder: There are more opportunities than ever. The problem is hardly anyone has the money to go out and pick up those opportunities and do something with them, or if they do have cash, they are too nervous to spend it.
Certainly there will be a lot of new opportunities created by companies having to dispose of assets under distressed conditions.
The concern is – who is in a position to take advantage of it? Not many people.
Still no matter how gloomy the outlook may be in the short term the reality is, in due course, the cycle will turn around. The resources boom we were enjoying until just a few months ago was never really over, it was just prematurely suspended by this global credit squeeze.
When that is finally resolved, growth in China and India will resume at the level it was and the demand for commodities will still be there. There hasn’t been a huge increase in new supply, so once demand comes back, there might be an even bigger resource boom than there was over the last couple of years.
If there is, it will mean greater opportunities for everyone who has survived. There will be projects and options available at every level. The big companies will be looking for major projects but even the small companies (if they have capital when that day comes) will be able to initiate some very exciting projects.
Darnbrough: What advice would you have for mining and minerals professional, as well as suppliers and distributors in this sector, as we move in to 2009?
Lowder: There are essentially two attitudes you can take. One is to put up the shutters, close the doors and say “go away and come back in two years time.”
The second, that more aggressive companies would take, is to recognise that some opportunities are still out there that can be financed one way or another.
There are still opportunities for the right situation and the challenge now is to find the right kind of business that will be supported by financial institutions.
We are going to have to be more creative than ever and come up with more robust business ideas.
It stands to reason that, in boom times, people get a little sloppy and money gets thrown at things that in the cool light of day should not have been financed. Now there will be a fight to quality and companies will be looking for projects that are demonstrably sound and robust.
Companies should spend their time preserving capital but still look to grow. Rather than postpone the inevitable demise, if you can get out there and use some creativity to find a way to grow despite the circumstances, those companies will emerge stronger than ever.
Malachite is in the position where it has adequate cash to survive for some time, if we did nothing. But, we don’t want to do nothing. We have been encouraged by our shareholders to get on with the business and the indications are that they would support us in that. We do have some good opportunities. We are currently close to decision points on a couple of projects. If one emerges as a potentially robust project, I believe we will be able to finance it.
When resource prices come back, they will come back very rapidly and it will be the companies that have done their homework that will be the greatest beneficiaries of the new boom times because they will be right there and ready to go.
Darnbrough: What key messages would you have for the mining audience on the economic times ahead?
Lowder: Now more than ever, there is a need for focus and a sound business plan. Companies that are spread over wide geographic areas or that are dabbling in too many different commodities at once are going to find it difficult to advance their cause.
It is important to be focused and it is important to recognise the necessity of generating cash, whether that be by production or by trading assets.