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London 26 October 2009 

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.”

Ends --

63 listed mining and metals companies covering the period 1980 through to 31 December 2008. The sample represents companies from across the globe with particular focus on UK, US, Canada, South Africa and Australia.