Johannesburg, South Africa — MININGREVIEW.COM — 02 August 2010 – Mining companies are digging deeper than ever for new capital, favouring equity offerings over bank debt, as sources of cash.
An Ernst & Young (E&Y) global survey on the risk factors for the mining industry shows that sourcing capital for the sector has dramatically changed in the past year, and that equity, though considerably more expensive than bank loans, has become a much larger source of cash.
Adrian Macartney “’ South African head of mining and metals at E&Y “’ says there is a likelihood that mining projects will soon be individually listed, as they were before the major consolidation period in the 1990s.
Before the global recession in 2008, large mining companies received 61% of their capital in loans, but in the past year the proportion has shrunk to 29%. Before the recession successive rights issues produced 17% of the available capital, but last year they increased to 34%.
This means that capital has become more expensive, since loans are the cheapest source of capital as companies are not taxed on the interest on loans, says Macartney.
Currently the big risk for the mining industry is the allocation of scarce sources of capital. Expectations regarding the rate of the recovery following the recession, debt ratios and the cost of debt and equity as sources of finance, have all dramatically altered in the past year.
The result has been that the capital structure of mining companies has changed, says Macartney. Before the crisis these companies maintained high levels of debt to finance acquisitions, but the perils of high indebtedness became clear during the recession when the usually friendly bankers became less friendly.
Over the past year organic growth has become very important at the expense of generic (acquisitive) growth.