The treadmill is broken

WITH senior producers feeling the pain as much as junior explorers, funding conditions for mining companies have hit dire straits. Could private equity be the industry’s saviour?
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Bloomberg Research metals and mining head Ken Hoffman

Kristie Batten

Bloomberg Research metals and mining head Ken Hoffman believes it may be the industry’s only option as funding continues to dry up.

“The world mining industry is in abject crisis right now,” he told MiningNewsPremium.

“If you look at the data, since the end of 2011 the price of gold, for example, is up around 18 per cent, the seniors are down 40, the juniors are down 60 – our indices have thousands of companies and they’ve all been decimated.

“Usually demand falls off, price collapses, companies go out of business. Okay, I understand that. That’s business school 101.

“Prices are flat, or even up in some cases, or down slightly – company after company going bankrupt. What the heck’s going on here?

“So that’s sort of the issue we’re dealing with.”

According to Hoffman, cost control wasn’t the only thing impacting equities with exchange traded funds another factor keeping investors away, which could get worse when a copper ETF is introduced this year.

“There’s no mine risk, there’s no by-product risk, there’s no government risk, there’s no strike risk, there’s no force majeure risk – all that stuff,” he said.

“It’s liquid beyond belief – I can go in and out five times a day if I want, so when they left the industry – as much as everyone says that hedge funds are evil guys – they gave that liquidity there that kept the stocks at a certain level.

“Who’s left? The small-cap, mid-cap, large-cap mining funds … their performance got worse and worse and worse, so what do investors do?”

Hoffman said the industry couldn’t raise capital right now and many companies would be facing bankruptcy in the next 12 months.

“All the mining companies – they’re all in trouble,” he said.

“The mining industry globally has the single biggest financing cost of any industry.

“The yields on debt in the mining industry are more than 300 basis points above the industrials.”

PricewaterhouseCoopers partner and global mining leader Tim Goldsmith was just as concerned about the state of the industry at Mines and Money Hong Kong last month, saying last year was a horror year for companies wishing to raise equity.

“I don’t think there’s ever been a harder time to raise funds for early stage exploration,” he said.

Hoffman agrees, saying the entire funding model is busted.

“What we’ve been saying, if there’s a treadmill in the industry, the geologist goes out, the geologist sees a property, he sees a major company, tries to develop it, moves along and tries to get funding and that moves up to the seniors eventually, whose assets are depleting – that treadmill today is broken,” he said.

“Because the little guys cannot raise, the big guys on the other hand fired all their chief executive officers and every new CEO is going to walk in and the term you’re going to hear is ‘portfolio optimisation’.

“They’re going to sit down, they’re definitely not going to buy anything because that’s what got everybody else fired and they’re going to look at their asset portfolio and they’re going to say ‘what makes sense and what doesn’t?’”

Hoffman said the increase in assets for sale was like “Christmas morning” for private equity, though the extent of its involvement in the mining industry had been limited up until now.

“So you have two choices today – you have the royalty guys, who I call the mafia of the mining industry, who are getting margins of almost 80 per cent because they can get any tonnes they want, or private equity guys,” he said.

“Only 2 per cent of all private equity money is in materials.”

Hoffman said the advantage of private equity was that it had almost unlimited access to capital.

“You know when we talk to some of these guys, one guy raised $3 billion just like that. None of these miners can raise 30 cents if they wanted to,” he said.

“At this point in the market private equity has access to the most capital but private equity has a problem – with the world economy the way it is, do you want to buy an industrial?

“If you want to buy anything, it’s very, very difficult and most of the assets around the world have been rising in price.

“Equity prices are at an all-time high, except for one industry – the mining industry, which is dead on its back.”

Hoffman said he’d been endlessly travelling recently, giving presentations to private equity funds which were starting to see the opportunities in the mining industry.

He said the interest was reciprocated, with one of the largest private equity funds forced to hire office security guards to tackle the high number of walk-ins competing to hand presentations to fund managers.

“They were all saying there’s desperation from these guys,” Hoffman said.

Hoffman said junior explorers were likely to struggle to attract private equity funds, with developed assets the biggest attraction.

“From what they were saying they were looking for developed assets, they were looking to run assets,” he said.

“There’s so much easy picking fruit from all the good assets that are operating. Often it’s really bad management in this industry.”

He said there was a perception that private equity guys were evil but that had to change.

“You have to root for these guys because the way you break the cycle is – those guys have a tonne of money, which brings in more private equity money,” he said.

“All of a sudden there’s private equity guys going around looking for deals and then the investors are saying ‘I can find the things that private equity is going to buy’ and then all of a sudden we start moving this back up and the conveyer belt can start going again.”

With financial instruments causing the “death of the mining industry”, Hoffman said there was nowhere left to turn for miners.

“If private equity guys leave the space or aren’t successful, I don’t know who’s going to fund these guys at all,” he said.

“I do think the private equity will be very successful.”