Corporate accounting firm Ernst & Young have come out with dire warnings for small miners, saying they are exhausting so much cash they may be compelled to merge with competitors, sell assets at a cut price and raise money at lower rates.
Their analysis was based on a sample of 354 listed base metals and coal companies with a market capitalisation of $500 million or less.
It showed the companies have, on average, only less than two years left of spending if the current trend continues. Some could collapse, the report warns.
“Many of these companies will need to look at deeply discounted asset sales or dilutive capital raisings and although neither option is attractive, as time passes the situation seems to be deteriorating,” Ernst & Young’s Justin Walsh said.
“Some of the weaker players will no doubt fail.”
Economist Ross Garnaut recently hit back at coal companies for ‘dudding’ shareholders by over-investing in projects and being in denial about the dip in global demand.
According to the Bureau of Resources and Energy Economics, around $73.5 billion worth of coal projects have been publicly announced but construction is yet to begin.
The situation becomes worse when the report narrows focus on 287 companies with a market capitalisation of less than $50 million. They only have about 18 months left.
The AFR uses a straightforward formula from the report to pinpoint to companies with only a month’s supply of cash left. The report takes cash balance from publicly available financial reports and divides them by expenditure over the previous 12 months.
The companies in this category include Firestone Energy, UCL Resources and Cockatoo Coal. The first two companies currently have takeover bids in the offing.
Cockatoo Coal sold its stake in Hume Coal two days ago, leaving Korean steel company POSCO the only owner of the Southern Highlands coal project.
Cockatoo Coal’s managing director Andrew Lawson said the company will concentrate on its mine at Baralaba in Queensland.
“We wish POSCO Australia well with its endeavours at Hume and look forward to continuing our strong relationship with the group,” he said.
Its shares did not react well to the news, slumping 17 per cent since.
With a market capitalisation of $38 million, Cockatoo Coal was a key contender for suitors, according to Ord Minnett senior financial adviser Angus Bligh.
“Cockatoo is a classic example of a small coal company seemingly under cash constraints and I think they will struggle to attract investors as their share price fall,” he said.
He added the company only had $6 million in cash available to them before they sold their stake in Hume Coal.
“They also have to look at how to fund their Baralaba expansion project as well as refinancing the existing $100 million KEB Australia loan by the end of June 2013. Other small companies are heading in the same direction – the market knows they have to do something soon because they can’t develop these projects themselves.”
Lawson said the downgrade of a large debt facility in December last year from $150 million to $100 million resulted in a decrease in cash on hand and these moves should be taken into account.
“We have an operating mine that continues to be cash positive. With our expansion projects we will obviously tailor our expenditure to match our current financial circumstances,” he said.
He would not divulge details on staff cuts and asset sales.
RBS Morgans senior mining and metals analyst Tom Sartor said the first thing companies were doing to tackle the cash shortage problem is trimming staff and investment in tenements.
“The coal juniors have heavily reduced their spending by cutting back on field programs, reducing their overheads and in some cases rationalising their lower-priority exploration acreage,” he said.
Companies may also need to look into asset sales, similar to Cockatoo Coal.
“What’s really interesting is that many in the market see asset divestment by the majors as a potential signal that we may be approaching the bottom of the market,” he said.
“We hear about billions of dollars in known funds looking to invest in the sector, although none of those players have yet been prepared to make a meaningful move this time around.
“So far there’s been little tension suggesting that sellers need to move in a hurry, unless of course their funding is running short.”
Australian Mining recently gave tips on how smaller mining service companies are coping in tough economic conditions, and the mining downturn. There are three steps to take.
First companies are laying off staff and cutting down the fat. Second, they are diversifying into other sectors. Finally, they are looking for efficiencies including clean technology, and cost effective methods.