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In depth: How to manage captial in a constrained environment

Professional services firm EY’s transaction advisory services director Quintin Hobbs warns that the African mining industry is facing a time of project capital scarcity, which is in line with global trends. The situation has led to consolidation and an increased focus by mining majors to optimise Tier 1 assets and divest of non-core assets, writes Chantelle Kotze.truck

Not all is doom and gloom however. Hobbs expects to see a gradual recovery over the next five years. “Although there is no immediate sign of improvement, we are first likely to see further consolidation and portfolio optimisation, as well as the refinancing of indebted or distressed companies and assets, but commodity prices will eventually recover and capital availability will improve,” he proffers. Despite the positive long-term outlook, the current reality is that the global capital scarcity trend will remain in the short term. To make matters worse, this trend is being further compounded by a global trend towards risk aversion, halting many greenfield projects, as they are difficult to finance in this environment.This is impacting heavily on the many early stage and greenfield developments in Africa, already facing the very real challenges in Africa of high operating costs and a lack of infrastructure and electricity supply.

Other reasons further impacting on project bank ability in Africa is the impact of resource nationalism and the high costs associated with gaining a social licence to mine. To overcome this, mining companies are increasingly investigating ways to obtain alternative sources of financing to take their projects forward, or at least optimise them, towards healthy, free cash flow and shareholder returns. In order to make themselves attractive to investors in a bid to raise capital, Hobbs advises mining houses to do their homework correctly to ensure that their projects are bankable. Mining houses can achieve optimal management of their capital by……

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