Private capital funding for junior miners is proving to be the most viable project funding option at this time, as public funding for miners, especially funding for junior miners, has collapsed worldwide.
This was said by private equity information and analysis firm Pangea Exploration chairperson and CEO Rob Still at The African Mining Network’s bimonthly event, held in Johannesburg, earlier this month.
He says $20.6-billion in private equity has been raised in the last year, half of which – between $10-billion and $15-billion – was available to the mining sector.
“To put this in perspective, however, the $20.6-billion is equivalent to the 2012 initial public offerings (IPO) public raises, and, while it is substantial, it is limited and also only available for strong teams and outstanding projects,” says Still.
There are various factors that contribute to the breakdown of mining capital markets. One reason is a result of the slowdown in China’s growth, owing to the country’s demographic trend towards an ageing population, which will become apparent only over the next 20 or 30 years.
Still, who is also the chairperson of Metorex and a director at Zimplats Holdings, Pan African Resources and Kimberley Diamond Company, highlights that China’s ageing demographic profile is linked to its economic performance. “There is no doubt that when countries struggle with an ageing demographic, they struggle to achieve good numbers on the economic front,” he says.
He notes that this ageing demographic has, however, been disguised and dampened by China’s fast industrialisation and urbanisation, as well as its consumption boom and per capita income.
Another reason for the collapse of mining capital markets is the breakdown in confidence in the junior mining sector. “Statistics indicate that 75% of mining IPOs over the last few years are failing, while the average loss over the last five years is 30%, with the 2010/11 IPOs trading at an average loss of 50%.
Still says an ageing investor base means that investors who were risk takers in the past, no longer take risks.
Further, there is also a problem with forecasting prices. A 42% average statistical error exists in the statistical reports of the top 15 merchant and investment banks, wih a 40% average statistical error in the forecasting of gold and nickel prices alone.
In addition, capital expenditure overruns are also a big reason for the breakdown in the mining capital markets. Statistics show that over the last five years, there has been an average of 56% in capital overruns in the mining industry. “This has a negative influence on the returns on mining projects. It could also be the reason for all of the IPOs being down and for the crisis in confidence in the junior mining sector,” notes Still.
Equally, the operational costs of most projects are also underestimated.
Meanwhile, Still says the implications of the crisis in the mining capital markets are that there is going to be a declining number of junior miners worldwide, there are going to be collapses and down round financing, mergers and asset sales will occur. Burn rates are also dropping, which means that juniors are running out of cash.
The African Mining Network has been established to develop and build relationships across Africa’s mining community.