Junior miners could see rise in mergers: E&Y

LONDON — Mergers of junior miners may grow increasingly common in 2013 and beyond as traditional financing avenues remain difficult to access, according to an industry analyst at London-based Ernst & Young LLP.

“We’ve not seen much of it yet, but we may start to see junior-to-junior mergers to create scale, to create more liquidity and to gain leverage from management expertise,” Lee Downham, global leader for transaction advisory services in the mining and metals sector at Ernst & Young, said. “They could benefit from the classic ‘2+2=5’ scenario.”

Securing financing will likely remain a tall order for juniors and explorers as investor sentiment is firmly risk-off, Downham said.
“Traditional sources of finance have fallen away for juniors. The equity markets have been very soft, and historically, that’s been their key source of finance,” he said.

“There’s risk aversion from the banks because of their increasing capital requirements, and project financ(ing) has been much harder to obtain,” Downham added.

Nontraditional forms of financing have become increasingly prevalent since 2012, a year in which successful initial public offerings were few and far between. Private-equity funds and state-owned enterprises—mostly from Asia—have become common sources of capital, Downham said.

“Last year was very much defined by an increase in private capital being used to fund junior miners,” he said. “Even with the emergence of private capital, though, financing is incredibly hard to secure. The junior sector is really suffering.”

The situation is unlikely to change significantly moving forward, although equity may grow slightly more available, Downham said.
“Equity markets will be improving, but it’s all relative—last year was very poor,” he said. “The global economic situation has improved, though. Events in Cyprus have pushed us back, but the U.S. market is looking more promising.”

Fears of a Chinese slowdown have been overblown, Downham asserted, and the global market will likely become less volatile this year.

“Although things are not back to pre-2009 levels, that will help in terms of the equity markets. Less volatility is always good,” Downham said.

Fundamentals are difficult to pin down, as such wide gaps have opened up even among the base metals markets, he added.

“You can’t make any generalizations across commodities now,” he said. “One thing we’ve really learned is that they’re very different. You can’t talk about the mining sector now in terms of whether it’s doing well or badly (as a whole),” he added.

In terms of supply and demand, the amount of metal entering the market is declining more or less across the board, Downham said.
The number of capital projects has also fallen as many have been put on indefinite hold, Downham said. Meanwhile, additional projects have been scaled back.

“The demand side doesn’t seem to be slowing down quite as much as people thought. Overall, in the next three to five years, we expect to see commodity prices strengthening (because of that),” he added.

“Projects that were invested in three to five years ago are also coming online in the next 12 months,” Downham said, “So the supply-demand balance isn’t being disrupted by the capital-constrained market in 2012. I think that’s where we will see benefit in the medium term.” 

A version of this article was first published by AMM sister publication Metal Bulletin.

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