Funds raised by mining and metal companies fell more than 25 per cent last year from 2011, the first annual drop since the 2008-09 global financial crisis, according to the first tally for the whole year released by consultants Ernst & Young.
The drop in capital raising was so acute in the second half of the year that insiders spoke half-jokingly about a “capital strike” as companies cancelled projects.
Ernst & Young estimates that capital raising by miners and metal companies amounted to $249 billion (Dh914 billion) in 2012, down from $340 billion in 2011, because of a sharp drop in proceeds from initial public offers and syndicated bank loans.
The capital strike is especially felt by the so-called junior mining companies listed in Toronto, London and Sydney. Junior miners bear the bulk of the exploration efforts in the mining industry and executives worry that the lack of funding will result in fewer discoveries of ore deposits.
Lee Downham of Ernst & Young said: “The capital strike by many mining and metals companies in the face of rising costs and softer prices in 2012 will continue until commodity prices recover sufficiently to encourage new investment.”
The biggest drop in capital raising hit the equity market, both in initial public offerings and rights issues. The value of IPOs last year retreated to their lowest level since 2007, with an 81 per cent drop in proceeds to $1.3 billion.
“It is difficult to find logic in the indiscriminate nature of the pullback from equities,” the consultancy said.
Moreover, widespread risk aversion culminated in a 48 per cent reduction in secondary equity proceeds to $26 billion. “Around 20 per cent of issues by junior companies were ultimately priced below their filing range, indicating the extent of the challenging funding conditions,” Ernst & Young said.
Bank lending also fell sharply last year as banks reduced their exposure to the sector to beef up their balance sheets ahead of new Basel III regulations.
Banks lent miners and metals companies $106 billion last year, down 43 per cent from 2011. “For mining and metals companies, the reduced availability of bank debt inevitably increased borrowing costs with increasingly restrictive covenants,” the consultancy said in its quarterly review of the mining sector.
Bond issuance was the only bright spot in the sector, with record proceeds of $113 billion, up from $83 billion in 2011, as companies used bond markets to diversify their reliance on bank debt. The consultancy said the average coupon on 5-10 year US dollar notes by investment-grade mining and metals companies fell last year to 3.9 per cent, down from 4.7 per cent in 2011.
The sector’s ability to raise funds could improve this year as global economic growth gathers pace - but the trend of lower equity and bank loan availability and the rise in bond issuance is here to stay. For mining and metals companies, as Downham puts it: “Ultimately the financing game has changed.”