[Deuda-QdQ] Mining 'wall of debt' severely constraining global supply growth prospects

[Tom Kucharz - Ecologistas en Acción]

http://www.mineweb.com/mineweb/view/mineweb/en/page67?oid=91344&sn=Detail


Mining 'wall of debt' severely constraining global supply growth prospects

The severe debt position faced by the world's biggest mining companies 
will have an adverse impact on future supply growth and hence could lead 
to sharply higher commodity prices.

Author: Ernst & Young
Posted:  Monday , 26 Oct 2009

LONDON -

The world's largest listed mining and metals companies are burdened with 
a "wall of debt" that is having a severe impact on future supply growth 
and could lead to higher commodity prices over coming years, according 
to a report released today by Ernst & Young.

Wall of Debt, which tracked the performance of a sample of the world's 
largest listed mining and metals companies over almost three decades, 
shows that debt levels remain a major concern across the mining and 
metals sector due to the dramatic levels of borrowing that occurred 
during the peak of the cycle in 2007/08.

IPO ACTIVITY TO RETURN TO THE SECTOR?

Lee Downham, mining and metals partner at Ernst & Young LLP says that 
this "wall of debt" is likely to have a severe impact on the future for 
the whole industry as it struggles to bridge the supply gap. "We will 
see a return to equity as the major source of growth funding, together 
with innovative transactions less reliant on debt funding. We also 
predict an increasing role for sovereign wealth and private capital and 
possibly even a return to IPOs and separate listings for individual mine 
projects."

FINANCIAL CRISIS

The financial crisis that unfolded during 2008 and the resulting 
collapse of commodity prices has had a dramatic impact on the earnings 
outlook of the companies that Ernst & Young has included in its 
analysis. Downham explains, "Management rightly turned its attention to 
debt restructuring and the curtailment of operating costs and capital 
outlay last year.

 As a consequence the ability to finance the pipeline of new projects 
has been reduced dramatically. Long term fundamentals for metals and 
minerals demand remain robust, but supply is being curtailed and there 
is a real danger of a supply gap emerging in several metals and minerals".

WHAT DOES THE FUTURE HOLD?
The report suggests that new bank debt has become very difficult to 
obtain and the corporate bond market is essentially only open to 
companies with acceptable credit ratings, and even then they are 
constrained by credit limits. As a result, more innovative financing and 
merger and acquisition structures will be required. This is likely to be 
reflected in fewer contested transactions, and a greater focus on 
synergies rather than growth to obtain market share.

Downham concludes: "There is likely to be a return to equity financing 
for both acquisitions and new project development. Acquisitions by 
listed mining and metals companies will more often be proposed on the 
basis of all-share swaps, with little or no cash element involved.

"Given the difficulty in raising new debt and the pressure to pay down 
existing borrowing, equity raisings will become more prevalent. There is 
likely to be a particular emphasis on strategic investments and even the 
financing of individual projects through IPOs at a project level."