Bruce Dickinson, Partner in the Corporate Practice and head of the Mining Sector Group, Webber Wentzel.
How will mines fund future growth and development in the face of a historically low commodity cycle that seems to have no short-term end in sight?
As the mining industry struggles in the face of many unresolved challenges, from tumbling markets, labour and regulatory uncertainty, a flight of finance and growing operational risks, mining companies are struggling to adjust to the new normal. Without a realistic assessment of history, what it means for the future and a willingness to morph and evolve its business models, mining companies will be hard pressed to identify and capitalise on the real drivers of future growth.
China’s economic slowdown and subsequent lower demand for commodities have blown a hole through the mining sector, and in South Africa, this is exacerbated by significant labour strife as well as ongoing regulatory uncertainty and power constraint. Investors are nervous. As exploration dwindles, juniors and even large caps are fighting hard for survival. Amidst all of this, mining companies are still expected to bolster the economy with their taxes, profit sharing, increasing wages, infrastructure spend and local community development. But what happens when the cash reserves run out and a major mining operation collapses?
As a consequence, with traditional sources of funding having dried up, mining companies are being obliged to restructure their operations, refocus capex and opex and divest non-core assets and maybe, in some cases, some crown jewels in order to free up cash and/or reduce debt.
Everyone anticipates that at some point in the near future there will be an increase in merger and acquisition activity and to an extent we are starting to see it happen. Although there remains uncertainty as to whether or not we are seeing the bottom of the market, one key uncertainty that seems to be dissipating is the pricing gap. Though still a factor, the bravado has dissipated and the reality of sustained low commodity prices is sinking in. Pricing has become more realistic, with increasing innovation in deal structuring, both in respect of covering off against downside risk for the acquirer and upside participation in future profits for the seller. It certainly is an environment which cries out for PE, junior / mid-tier and entrepreneur investors to get in. Assets that would usually be significantly beyond their reach are there for the taking. Now is the time to pick up some good assets at great value and on sensible terms.