February 2012

Alternative prospects

“There are unconventional pots of money out there”

By Anna Reitman

With the Eurozone crisis plunging the world’s economy into a second phase of financial turmoil and, as a result, an extremely varied M&A landscape, miners are bracing for an unpredictable time in the traditional debt and equity markets. Amidst the uncertainty, though, more miners are harnessing alternative financing strategies to move their projects forward.

“It is about optionality these days,” says Lee Downham, partner in charge, global mining and metals, transaction advisory services at Ernst & Young. “You need to keep all of your funding options open and not necessarily expect that you can fund in the traditional equity and debt markets. Availability of financing will not go back to pre-crisis.” According to Downham, all things being equal, companies that pursue private wealth options alongside traditional sources of investment will get their financing before those limited to tradition.

Many financing experts point to the recently acquired European Goldfields as an example. In October, Qatar Holdings agreed to lend US$750 million to European Goldfields, which is listed in Toronto and London, to fund the development of mines in Greece. The Qatari sovereign wealth fund put up a $600-million, seven-year loan secured against Greek gold assets, and an additional $150-million unsecured loan. European Goldfields has now agreed to be bought by Eldorado Gold for $2.4 billion, superseding the Qatar Holdings deal, but it is the strategy itself that fund managers are looking at – both in picking companies and in supporting companies already held that are seeking financing.

The wealth of sovereigns

According to Ernst & Young research, companies in the initial public offering (IPO) pipeline, ranging from some $200 million to several billion dollars in size, have been facing delays of up to 18 months in anticipation of more stable markets. However, securing private funding in the interim could help underlying assets progress and deliver a stronger story for an IPO when it does happen, Downham explains.

And that is advice that could affect a broad swath of companies. Ernst & Young reports that the majority of transactions in 2011 were juniors looking to bring assets to market, although there has been an increase in the $200-million to $1-billion asset range since 2008. At the same time, large placings across the major producers have decreased. According to Downham, this trend is likely to continue because companies across the sector are still wary of falling back into pre-crisis levels of leverage.

“Majors are limiting buying activity to low-cost, high-grade, scalable assets or to companies that can offer at least some kind of operational overlap that nobody else can bring, such as technical expertise or cost benefits,” Downham explains, adding that the large miners continue to look at iron ore and coal, with copper staying strong on fundamentals. But companies seeking mine financing need to recognize that the world has changed.

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