Lawrence Williams | Fri, 4 Feb 2014, 14:38 [moneyweb.co.za] – ‘Equity valuations for mining companies remain depressed’ – Rajat Kohli.
CAPE TOWN (MINEWEB) – In a release timed to coincide with this year’s big Mining Indaba meeting in Cape Town, Standard Bank’s London-based global head of mining and metals, Rajat Kohli had some very pertinent comments to make on the necessity for the mining industry to consider innovative funding structures in 2014. Equity markets are spurning new resource ventures amid continuing uncertainty in the commodity price outlook, spurred in part by the Federal Reserve’s decision to begin withdrawing its unprecedented monetary stimulus. Meanwhile existing quoted companies equity valuations, particularly in the gold sector, have fallen so low that raising money in equity markets leads to unacceptable dilution.
“Equity valuations for mining companies remain depressed and if you can’t raise enough capital in the share market it’s going to be even harder to raise debt finance for all but the most established miners,” said Kohli, “In that context mining companies are going to have to make use of more creative financing solutions to access project gearing. We may see a combination of debt and equity financing as well as hybrid structures involving mezzanine debt, subordinated debt or convertible arrangements.”
“Standard Bank estimates that net financial outflows of investments (e.g. ETF’s and commodity index swaps), in 2013 was $USD35bn, the majority of this coming in gold. But, ex-precious metals, the picture was more stable.”
Kohli says mining houses can access alternative sources of capital with sovereign wealth funds, private equity, hedge funds, high net worth families, and commodity trading firms the most likely sources of new capital. There are also possibilities through streaming and royalty deals with specialist companies involved in this sector.
As has been pointed out already in presentations at Indaba, there is a great deal of potential in the private equity sector – as exemplified by new organisations being set up to invest in mining by such key players as Mick Davis the former Xstrata CEO, who is raising a reported $3 billion to build a new mining company by taking advantage of the hugely depressed mining equity markets and picking up companies with exciting prospects at hugely reduced valuations. Former Barrick CEO Aaron Regent is also reported to be conducting a similar exercise.
But back to Kohli’s comments: “Because equity markets have dried up we have seen some influence from these sources but they haven’t filled the equity gap entirely,” he says. “There’s still some scope for them to increase their exposure to financing mining exploration and extraction.”
2014 will also see innovative new funding structures become more prominent in the mining sector, reckons Kohli, such as the streaming agreement between Teranga Gold Corporation and Franco-Nevada, which helped fund the acquisition of the remaining interest in Oromin Joint Venture Group. The agreement saw Franco-Nevada advance cash to Teranga to help fund the transaction in exchange for a supply of future gold at a discount to the spot price.
“We’re likely to see a lot more examples of this sort of funding arrangement in 2014 and beyond,” said Kohli. “Everyone is looking to fill the equity, and indeed debt, gap, and this is an innovative example of how to achieve that.”
The Federal Reserve’s decision to cut its monthly bond purchases to $75 billion from $85 billion as part of a decision to unwind the monetary stimulus mechanisms that were implemented in the wake of the 2008 financial crisis has had anegative impact on the gold price, prompting a 15% decline in the precious metal last year. However the latest Fed decision to taper by a further $10 billion a month, does not seem to have had a similarly strong adverse impact on gold. While gold’s status as an alternative store of value to the dollar makes it the most vulnerable asset to the Fed’s so-called monetary tapering, Kohli believes other commodities will not be immune to the reversal of cheap US central bank funding.
“Tapering will undoubtedly suck a bit of froth out of base metals although it won’t be as dramatic as gold,” said Kohli. “Last year was a difficult one for commodities as the negative impact of tapering was priced in, along with question marks about Chinese growth, and we think that will keep investors relatively cautious on commodities well into 2014.”
On Africa in general, Kohli comments that the Continent continues to offer considerable development potential with West Africa’s gold and iron ore deposits, the central African Copper belt and fertiliser raw materials such as phosphate and potash being prime examples. Nevertheless, financing will remain a challenge given the uncertain outlook for commodity prices.
“Africa remains an attractive mining destination due to its ability to offer assets at relatively attractive prices compared to other jurisdictions,” says Kohli. “Political and regulatory stability is improving. The only question is what sort of funding will be forthcoming.”
This does indeed echo the views of some of the speakers at Indaba, but with Africa political risk remains present in the form of instability in a number of nations which does colour some bankers’ viewpoints for example. But again, African governments of whatever hue, tend to be pragmatic in their approach and some mining companies, like Randgold Resources, have become experts at negotiating potential pitfalls involving changing governments, very successfully. Indeed political a geological risk is something Randgold’s CEO in presenting the company’s latest quarterly and annual figures here yesterday, highlighted with a map showing those countries which the company feels, from its own experience, present far less risk for mining investment. But then there are other African nations where it will remain extremely difficult to raise any kind of significant investment for new mining projects, however this might be structured.