Exploration funding - trends across the Mining & Metals industry

Transcription

1 Exploration funding - trends across the Mining & Metals industry David Russell, Ernst & Young Global Mining Finance Spring Conference April 2012

2 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q AIM funds raised GB m AIM total fund raised GB m Funds raised on AIM Quarterly trend of funds raised on AIM - mining and all sectors Source: Ernst & Young analysis of AIM market statistics 1,600 8,000 1,400 7,000 1,200 6,000 1,000 5, , , , , Mining new issues GB m Mining further issues GB m AIM total issues GB m Global Mining Finance

3 Index value Mining Eye and FTSE AIM indices The Mining Eye index has fallen 24% from its 2011 peak We expect volatility to continue, making funding conditions difficult, particularly for early stage juniors 3,500 3,000 2,500 2,000 1,500 1, Mining Eye FTSE AIM All-Share (rebased) Source: Ernst & Young, Thomson Datastream Global Mining Finance

4 Juniors in a hard place? Juniors can no longer rely on equity to fund their activities in the way they once could: Short-term behaviour of risk averse investors Cost of equity rising as investors demand more Impact of share dilution Share prices continue to retreat for many explorers, despite the successful addition of resources Project debt is available on a highly selective basis, but remains largely unavailable or prohibitive to early-stage explorers Costs, complexity and geo-political risks of the business of exploration are increasing Page Global Mining Finance

5 Resource confidence Reserve confidence Different funding options become available as exploration project matures into production Junior company activity Mid Cap and Larger Producing company activity Resources Exploration Predevelopment Primary zone for acquisitions and partnerships Valuation Fundraising Capex Construction Comissioning Production?? Reserves Measured Bankable Feasibility Study? Proven Indicated Probable Inferred Pre-Feasibility Study Target Time, exploration and development spend Scoping studies Valuation Unit-based valuation ie. Yardstick Method DCF, reserve/resource and cash flow based Sources of Project Finance Source: Ernst & Young Equity Pre IPO funding Private Equity funds Hedge funds Private investors Skin in the game! Equity / Notes IPO - General public Private and Institutional Equity funds Hedge funds Private investors Convertible notes Equity and Debt Private and Institutional Equity funds Hedge funds Private investors Equity markets Institutions and General public Development Finance Institutions DFI Export Credit Agencies Debt (Project Finance, Full Recourse and later Limited Recourse ) Refinancing. Senior Debt Royalties Page EYGM Limited. All Rights Reserved.

6 DEFCON 2-3? Defcon 5 Unsolicited offers of investment; turning money away; the market loves you Defcon 4 Comfortably cashed-up; cash-burn under control; normal market conditions Defcon 3 More cash needed; no unsolicited offers; -ve cash projected inside 6m Defcon 2 Active cash hunt; stock under pressure; -ve cash projected inside 3 months Defcon 1 Urgent cash search well advanced; less than one month s cash remaining. Alan Trench, Professor of Mineral Economics in Western Australia 2008 reached Defcon 1... Where are explorers currently on the Defcon scale?

7 There is a lagged reduction in exploration expenditure during periods of economic downturn... Non-ferrous exploration expenditure BRE-X Global recession MEG exploration data World GDP % growth LME Index There is a lag between exploration expenditure and the economic cycle Source: Metal Economics Group, Thomson Datastream, EY Analysis. Global recession as defined by IMF GDP growth of less than 3% Page Global Mining Finance

8 But the mining & metals sector has emerged from GFC financially stronger and poised for growth Bulks and metals price performance ( ) Copper Aluminium Iron ore Coal Gold Silver High commodity prices drove an improvement in earnings and cash positions This, together with the corporate bond market, was the primary source of funding for the majors Financing options have also become broader Gearing is at an all time low across the majors As a result, we saw the juniors take a greater share of available equity Source: Thomson Datastream. Rebased to 100 at 01/01/2011. Page EYGM Limited. All Rights Reserved.

9 Capital raising by mining & metals in 2011 caution and opportunism Opportunistic use of capital markets in 2011 Record proceeds raised for refinancing, acquisitions and project development Exploitation of favourable debt market conditions low rates, high demand Underpinned by caution Maintaining credit rating strength Leaving capacity on balance sheet to gear up for the right acquisition opportunities Capital raising by the global mining & metals industry (proceeds, ) Source: Ernst & Young, Thomson Financial Page EYGM Limited. All Rights Reserved.

10 Proceeds $b Number Corporate bonds now a key source of funding for the majors... Corporate bonds have become increasingly popular on the back of growing concern over government debt, particularly across the Eurozone 2012 is set to be another strong (record?) year with Q12012 bond proceeds more than double those raised in the same period a year ago Bond proceeds and number (2000-Q1 2012) Proceeds Number Source: Ernst & Young, Thomson Financial Page Global Mining Finance

11 ...with low benchmark rates enabling competitive pricing for issuers Low benchmark rates enabled investment grade companies to issue at record low rates e.g. BHP Billiton $1b global bonds due 2015 priced at 1% And drove investor demand for high yield opportunities, opening up the bond market to subinvestment grade issuers the mid-tier producers Significant divergence in pricing in 2011 on equivalent high grade and high yield bonds as risk was re-priced throughout the year Quality of bond issues, by share of proceeds ( ) Coupon ranges on US/Euro bonds by tenor and quality (2011) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% High Yield Emerging market Investment Grade Source: Ernst & Young, Thomson Financial Page EYGM Limited. All Rights Reserved.

12 Q2011 1Q2012 Proceeds $b Number Significant refinancing of loans by producers Majors undertook significant refinancing over half of proceeds - locking in favourable rates and extending maturities Majors have capacity to take on new debt but few will want to risk balance sheet strength and flexibility Loan proceeds and volume (2000 Q1 2012) Project finance loans for junior development projects were low in number and high cost Proceeds Number of loans Primary use of proceeds (2011) Debt remains largely prohibitive to the junior sector (with exceptions) Source: Ernst & Young, Thomson Datastream Page EYGM Limited. All Rights Reserved.

13 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Number of issues Average proceeds $m With the majors well-funded, follow-on equity makes its way to the juniors... With little need to raise equity among the deleveraged majors, a greater share of available capital has been taken up by the juniors <$200m follow on issues - volume (2011) Follow on issues by mining companies share of proceeds by size of issue ( ) Number of issues LME Index Average proceeds Source: Ernst & Young, Thomson Financial Page EYGM Limited. All Rights Reserved.

14 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Number of issues Average proceeds $m...but market conditions are challenging... The impact of depressed global markets resulted in a steady decline in average secondary equity proceeds over the turbulent 2 nd and 3 rd quarters A strong uplift in volume occurred during Q and Q1 2012, reflecting the strengthening of metals prices, but conditions remain volatile <$200m follow on issues - volume ( ) Number of issues LME Index Average proceeds Source: Ernst & Young, Thomson Financial Page Global Mining Finance

15 Q2011 1Q2012 Proceeds $m Number...and IPO market still contracting (though not completely closed) In 2011, excluding Glencore, IPO proceeds were down year-on-year by over 50% However, there was a relatively healthy volume of junior listings on TSX and ASX, with many companies choosing to gain a listing at lower proceeds rather than delay A slow start to 2012, with Q volume and proceeds down significantly on Q ,000 IPO proceeds and volume (2007-Q1 2012) , ,000 10, , Source: Ernst & Young, Thomson Financial Proceeds $m Glencore Number Page Global Mining Finance

16 Considering the options While the majors are unlikely to make a significant call on equity in the year ahead, juniors need to investigate, understand and prepare for alternative sources of funding Strategic partners (debt and equity) M&A Trading houses/downstream customers/asian investors for offtake Equipment suppliers Development finance institutions e.g. IFC, EBRD, IADB Mineral export credit agencies government agencies providing funding linked to sourcing locally produced mining equipment and services The majors Metal streams Royalties Convertible bonds Spin-outs to unlock hidden value from diversified portfolios Page Global Mining Finance

17 Recent financing arrangements on AIM The good news: this is already happening. A selection of financing arrangements agreed or concluded in Q by AIM-listed companies illustrates the range of finance that is available now for the right projects: IPOs Papua Mining, Bushveld Minerals Secondary issues of equity London Mining, Sirius Minerals Strategic equity investments African Eagle Resources Convertible notes African Minerals Offtake agreements Rambler Metals & Mining Debt facilities / loans Eastern Platinum Project finance Wolf Minerals, EMED Mining

18 The role of M&A Deal activity across the industry in 2011 saw mid- and junior-level producers acquire bolt on companies and projects to increase scale and production Sovereign wealth investors also made partial stake acquisitions or takeovers in the junior sector, to secure future supply of raw materials Q average deal size showed quarter-on-quarter decrease reflecting increase in smaller bolt-on activity and interest in exploration projects Juniors are in a catch 22 situation - while fewer companies with more assets would be potentially more appealing to investors, their share prices are so low that most are reluctant to embark on any M&A activity either as predator or prey. Number and value of deals Share of deal volume by size ( ) Q Q Q Volume p Value ($m) 31,572 28,279 25,310 q Average value ($m) q Median value ($m) q Source: Ernst & Young, Thomson Financial Page Global Mining Finance

19 M&A of juniors to increase in current climate? Depressed share prices provide opportunities for acquirers Explorers with funding shortfalls may become targets Sovereign wealth funds and Asian investors/customers will continue to seek strategic investments: prepared to invest at earlier stage, for the long-term leveraging a different appetite for, and approach to, country risk Many juniors feel undervalued by the current market those with funding in place may hold out for equity values to improve Geographies where M&A may focus: Zambian / DRC Copperbelt - Copper, Cobalt West Africa Gold, Iron ore Chile, Peru, Mexico, Brazil Gold, Base metals Page Global Mining Finance

20 Conclusion and outlook Robust demand fundamentals, strong balance sheets and an appetite for growth will drive a step-up in M&A in the global mining and metals sector in 2012 Uncertainty and volatility are likely to continue through 2012, which may continue to depress the share prices of juniors and inhibit their ability to raise equity The window for equity transactions may be short and sharp requires agility and preparation to be ready to seize the right opportunities In a competitive and volatile market, junior companies must explore, understand and be ready to exploit a wider range of financing options and funding partnerships than ever before Page EYGM Limited. All Rights Reserved.

21 Discovery E&Y services throughout the exploration cycle Junior Company Activity Mid cap activity Majors Activity Resources Measured Exploration Primary zone for acquisitions and partnerships Predevelopment Valuation Bankable Feasibility Study EY5 Capex Construction EY6 Production Proven Reserves Indicated EY4 Pre-Feasibility Study Probable Inferred EY3 Target EY1 EY2 Time, exploration and development spend Source: EY Page EYGM Limited. All Rights Reserved.

22 E&Y services throughout the exploration cycle Corporate issue addressed Services description (some services will be on-going through the life of the mining company) EY1 Financial Reporting Tax Reporting Accounting and audit services Tax structuring services EY2 Early fund raising Pre-IPO private funding Strategic and M&A advice EY3 Initial Public Offering Corporate Governance EY4 Review performance Restructuring Liquidation EY5 EY6 New fund raising through debt or equity or hybrid Management of growth, steady-state, underperformance or exit Accounting and audit services Financial and tax due diligence Financial reporting procedure Valuation business modelling Capital markets lead advisory Assurance and audit services Financial and tax due diligence Valuation business modelling Project finance Capital markets lead advisory Customer Performance Improvement Finance Performance Improvement Working capital improvement Supply Chain Performance Improvement Tax effective supply chain management Commercial and strategic advisory Operational restructuring Valuation and Business Modelling Tax Structuring Risk transformation and management including Internal Audit and Internal Control Financial audit and IT integration Human capital Sell side services (financial and tax due diligence, M&A) Committed private placement Bond Bridge Structure Assessment of IT infrastructure IT outsourcing advisory IT process improvement Legal entity rationalisation Business and strategic reviews Formal insolvency services Synergy identification, assessment and measurement Operational and financial carve-out Integration planning Page EYGM Limited. All Rights Reserved.

23 Our views and opinions Page EYGM Limited. All Rights Reserved.

24 Our mining experience We work with 25 of the top 30 mining companies globally. Our mining team are market leaders for inbound London main market listings in the sector. We audit 8 of the 23 FTSE All-share listed mining companies in London Aquarius Platinum Ferrexpo Fresnillo Gem Diamonds Hochschild Mining International Ferrous Metals Kazakhmys Xstrata We have the lion s share of inbound London listings in the mining sector Ruukki Group International Ferrous Metals Ferrexpo Fresnillo Gem Diamonds Hochschild Mining Kazakhmys Xstrata Ferrous Resources (aborted during 2010) We have advised on major transactions in the mining sector Xstrata s $5.9bn rights issue and associated acquisition of Prodeco coal mine Proposed merger of Vale and Xstrata Proposed Xstrata and Anglo American nil premium merger of equals Proposed West Africa iron ore joint venture Falconbridge takeover by Xstrata Inco takeover by Vale Phelps Dodge takeover by Freeport McMoran Kazakhmys investment in ENRC Rio Tinto s defence of BHP Billiton s $150bn hostile takeover approach CITIC s $185m investment in Oxus Gold plc Page EYGM Limited. All Rights Reserved. 2

25 Thank you David Russell Director, Global Resources, Metals and Mining Ernst and Young London Tel +44 (0)

26 Disclaimer This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research, or the exercise of professional judgement. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor Global Mining Finance