Home' Australian Resources and Investment : March 2010 Contents 14 • MARCH 2010 • AUSTRALIAN RESOURCES & INVESTMENT
In more stable times, the equity markets may have offered a
solution. In the wake of the global financial crisis, however, equity
financing has lost much of its lustre. Liquidity challenges on London’s
AIM have slowed deal flow through that market, and while Toronto’s TSX
has been recovering, equity financing mostly remains confined to
special classes of commodities, such as copper, gold and silver.
Struggling with a hangover of high debt ratios accumulated during
better times, more complex loan negotiations and the risk of facing
vastly altered terms upon renewal, unsurprisingly, mining companies are
seeking alternative financing options. In some cases, Asian buyers and
sovereign wealth funds have stepped forward to fill the gap. In others,
companies are turning to private equity players. In all cases,
organisations must remain laser-focused on capital efficiency if they
hope to weather the current downturn and position themselves for
sustainable growth into the future.
6 CONTENDING WITH A CHANGING CLIMATE
THE RISKS TO THE MINING INDUSTRY ARE RISING
For many years, mining companies considered climate change a purely
environmental risk that potentially could hamper productivity due to
unpredictable drought or flooding. Those days are done. Beyond the
environmental impacts of climate change, the issue poses real risks to
the mining industry more broadly.
3 Regulatory risks, such as the potential costs of compliance and
reporting requirements across different jurisdictions and regulations.
3 Physical operations risks, such as the potential for operational and
infrastructure impacts due to extreme weather events, rising annual
temperatures and altered precipitation patterns.
3 Financial risks, such as those related to carbon liabilities.
3 Market risks that may arise due to changing demand patterns.
3 Strategic risks related to accounting for uncertainty, such as future
regulation, technology availability and the price of carbon.
3 Supply chain risks, as suppliers factor in increased costs for
compliance and energy.
3 Litigation risks, as affected communities or non-governmental
organisations challenge companies or specific projects on the basis
of their greenhouse gas (GHG) emissions.
Carbon-emitting companies (such as coal producers) will need to
take steps to reduce their emissions, better measure and report their
output and engage in carbon offset trading. Even companies that are
not large emitters will need to adopt energy management programs to
limit their electricity consumption, which remains the primary
contributor of GHGs in the mining industry. Although many of these
challenges cannot be resolved in the short term, mining organisations
must continually refine their climate change strategies to keep pace
with changing industry dynamics.
“Environmental regulations, heightened risk and an emphasis on
cutting carbon have become more prominent in the mining sector.
To keep energy costs under control and avoid environmental
damage, organisations will need to develop focused climate change
Trevear Thomas, Principal, Houston, US
7 EXTREME MINING
SEARCHING FOR THE INDUSTRY’S NEXT FRONTIER
With so many organisations sticking to their knitting in a tough
economic climate, the pace of exploration has slowed in recent months.
As international demand begins to pick up, however, mining companies
once again will face an endemic industry challenge: finding quality
With each passing year, the easier-to-reach deposits are depleting,
forcing mining companies to consider more extreme locations. Already,
some organisations have expanded from the frozen lands of the Arctic
and Greenland to the Nigerian deserts in search of new assets. Since the
discovery of seafloor sulfides and hydrothermal vents, some companies
are exploring the feasibility of following the oil and gas industry’s lead
in an effort to commercialise underwater mining. And while it remains
challenging to forecast the viability of mines located in harsh climates,
mining companies continue to make efforts to expand their operations
across some of the world’s most remote and inhospitable regions.
Keeping pace with this shift requires mining companies to better
harness the power of technology to access difficult-to-reach reserves
and navigate complex geological structures. Although many obstacles to
this expansion remain, technological advances proceed apace. Today,
technology already exists to enable mining companies to upgrade the
quality of their products, making it more economically feasible to mine
previously questionable deposits. As this innovation continues, extreme
mining is bound to become more mainstream.
“Now that mining companies have cherry-picked the easier deposits
to mine and process, they will have to cast their eyes towards
harsher geographic climates and overcome rising metallurgical
Dr. Eric Lilford, Partner, Perth, Australia
8 THE VALUATION ABYSS
THE NEED TO MERGE STILL EXISTS, BUT THE DESIRE DOES
If one word could characterise the near-term prognosis for mining
industry mergers and acquisitions, it would be cautious. Burned by the
breathtaking drop in value across the world’s markets, many would-be
acquirers are hesitant about entering new deals with one notable
While China’s outbound merger and acquisition deal value decreased
in 2008 and 2009 due to the global financial crisis, Chinese companies
still engaged in a considerable number of transactions. In May,
Guangdong Rising Assets Management Co., Ltd. Became the largest
shareholder in Australian copper mine producer Pan Australian, with an
investment of US$140 million. In June, Wuhan Iron and Steel Group
acquired a 20% stake in Consolidated Thompson Iron Mines for US$240
million. In the same month, China Sci-Tech Holdings completed a
US$211 million purchase of the Martabe gold and silver mine in
Indonesia owned by OZ Minerals. This was followed by two additional
deals in July—Ansteel’s A$534 million investment to finance an iron
ore project in Australia and CIC’s acquisition of a 17.2% stake in Teck
Resources for C$1.7 billion.
Despite this flurry of activity, the pace of mergers and acquisitions
in other areas of the market is likely to remain slow. One would imagine
the case would be different for cash-rich companies, which have an
exceptional opportunity to acquire quality assets from struggling
organisations—many of which are looking to divest assets or be
acquired. But that hasn’t panned out. Given the volatile economic
climate, it would appear that buyers and sellers cannot find a middle
ground on valuations. In some ways, this challenge contributed to the
failure of Xstrata Plc’s bid for Anglo American.
In light of this cautious environment, many companies are taking
advantage of the lull to get their financial houses in order in advance
of the next wave of mergers. Organisations that have prepared for
alternative scenarios (as both buyers and sellers) will be better placed
to act decisively in the face of built-up pressure for consolidation in the
“The need to merge still exists, but the desire to merge does not.
Buyers are trying to take advantage of lower market valuations to
acquire quality assets, while sellers are trying to ignore the stock
market on the belief that they simply are undervalued. This is
making it nearly impossible to find a middle ground.”
Jeremy South, Partner, Vancouver, Canada
9 BIG BROTHER IS WATCHING
GOVERNMENT INTERVENTION TAKES A TOLL
Despite the need for improved collaboration between the mining
industry and national governments, tensions often still exist. This is
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