CHART: Mining capital crisis continues

Hundreds of mining companies still face financial conditions that threaten their existence, says consultants Grant Thornton in a new report.

Nearly one third of junior miners need to raise additional funds within six months, and just under 60% would need to top up cash within a year, according to a survey among 250 mining executives conducted for the report.

10% of juniors "don't know" if they need more money; probably a sign that they do.

The situation is not as dire for larger companies but even then 35% of major miners – listed firms with a market cap of more than $500m or private companies with 500-plus workers – anticipate a need to change their capital structure within one year

"It is an untenable situation for many mining companies, and one that has plagued the industry since the summer of 2010,” said Jeremy Jagt, mining leader for Grant Thornton Canada.

"We would ideally like to see junior miners holding sufficient funds to support their operations for a year or more. When they don’t, they gradually enter into a capital “Catch 22” – weakened to the point where they cannot sustain sufficient operations or keep projects moving to generate cashflow, but also unable to source affordable funding because they’re not producing cashflow and/or moving their projects forward. They struggle to get out of that cycle."

Grant Thornton expects mergers and acquisitions in the sector to double this year compared to 2013, but "for some mining companies, a rise in M&A and market upturn may come too late. One in 10 junior miners are likely to go into administration, and 16% are likely to halt operations temporarily, according to the advisory firm's survey.

CHART: Mining capital crisis continues

35% juniors are likely to acquire the 32% of majors expected to pick up other competitors or a unit of another company by the end of 2014. Similarly, 36% juniors and 27% majors expect to be sold or undergo a partial sale.

"This matchmaking balance between buyers and sellers underscores the likelihood of substantial M&A. But there are probably more junior opportunities out there than there are willing and capable buyers, which will lead to choosy acquirers,” the study notes.

Not all large companies are on the acquisition trail however. 38% of executives at majors say their company’s primary strategy is to manage fewer core commodities, and 27% will focus on fewer countries of operation.

What may also spur mining M&A is that private equity firms are sitting on approximately $8 billion of unspent cash. "Some private equity firms are taking a fresh view – they are willing to acquire mining talent and expertise to operate, rather than looking for a quick profit and exit," notes Chris Smith, mining leader, Grant Thornton UK.


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Image by Courtesy Arctic Star Exploration Corp.