While the combination of lingering commodity price weakness and generally suppressed markets spells continued challenges for the mining industry and mining finance, there are still good investment opportunities as a whole for traditional equity investors in the sector.
That’s according to Mark Tyler, Senior Investment Banker for Nedbank Capital, who contends that while the coming year will be challenging for mining finance role players across the globe, these challenges are likely to be particularly felt on the African continent.
Speaking in Cape Town at the 2015 Mining Indaba, Tyler points out that the pressure is likely to be felt across all commodity sectors for much of the coming year.
“Most commodity prices have been trending steadily downwards since 2013, resulting in an understandable reticence by equity fund investors to put new money into mining,” he explains, “and this reluctance to invest in mining is now spilling over into most other commodities as well.”
He argues that this investment reluctance is not only impacting negatively on existing commodity players, but it also brings with it a risk of stunting future growth and development in mining.
“Many of the mining projects that were being investigated in the days of easily available funding cannot go forward as investors have withdrawn their interest based on a probable lack of reasonable returns on their investments,” he explains, “which means that only a few of the more than 1500 prospects previously under consideration, are likely to be developed in the foreseeable future.”
And Tyler paints a similar picture for other forms of mining finance, notably equity-based funding, the overall global value of which has fallen every year from the heady heights it attained in 2010. And while the amount of mining equity raised in Africa saw a slight uptick year-on-year in 2014, the total equity value raised on the continent is also still significantly lower than was the case four or five years ago.
“That said, private equity-style investors will of course always continue to invest,” he points out, “as they are not focused on share price appreciation as the main driver of investment returns, but rather rely on growing the construction capital they invest.”
Asked about the state, and prospects, of other forms of mining finance, Tyler responds that these offer a mixed bag of opportunities.
“While the value of global Merger & Acquisition (M&A) activity has dropped fairly since 2011, mining M&A in South Africa remains strong,” he says, “ and many SA miners are exploring the possibility of expanding beyond the borders of the country.”
While he agrees that such African expansion demands a strong constitution when it comes to digesting political risk, this can be offset by a good knowledge of the available African assets and a solid understanding of the ins and outs of doing business on the continent.
But despite this somewhat bleak medium-term picture, particularly for equity funding, Tyler emphasises that mining finance is certainly not all doom and gloom.
“There are most definitely still opportunities to be had, particularly for those willing to investigate less mainstream commodities, like fertilisers and diamonds,” he enthuses, “and, of course, there will always be an appetite, albeit a small one, for low-cost producers of all commodities – even those that appear to be largely out of favour.”
“The bottom line is that whilst equity markets are tough and are set to remain so for the foreseeable future, good-value investment opportunities are available,” Tyler concludes, “however, African mining projects are likely to find it far easier to attract debt as their primary source of funding going forward, particularly if they can leverage a solid track record as a good developer or producer.”
ABOUT NEDBANK CAPITAL:
Nedbank is the principal banking subsidiary of Nedbank Group and is one of the largest South African banks. The London branch of Nedbank, established in 1906, is one of the oldest foreign banks in the City of London. Nedbank Capital is the investment banking business of the Nedbank Group. It provides seamless, specialist advice, debt and equity raising and execution, and trading capabilities to clients in all major South African business sectors. It is based at the Group’s head office in Sandton, Johannesburg, with large operational centres in Durban and Cape Town, as well as offices in London, Toronto, Namibia and Angola.