Economy forces companies to reassess core assets
THERE are several areas of investment that need to be considered when evaluating the outlook for the mining industry in SA and the rest of Africa.
Sandra du Toit, Head: Mining & Metals for Africa Corporate Finance at Standard Bank, says there are three levels of investment that take place in an industry.
The first is direct investment by institutional investors and retail shareholders who invest their funds with a view to obtaining an appropriate return on the equity they provide to companies. Apart from a few notable exceptions, this band of investors is probably cautious about the mining industry at the moment. Moreover, they will pay particular interest to news relating to the operating environment throughout Africa as well as commodity prices.
She says an exception to the overall caution is gold.
“The South African gold producers are producing stellar results for their investors. This follows both a weak rand and a stronger gold price.”
She says the middle tier of investment looks at the level of merger and acquisition driven investment being made by mining companies. In other words, whether local and international mining companies are still buying assets in Africa and SA. This might be as a move to enter the African continent or to expand their existing operations in Africa.
“This activity tends to be selective, often targeting individual mines or projects. At present there is a lot of activity in this arena. Unfortunately, it is mostly driven by divestment as major companies, such as Anglo American, seek to shed noncore assets.
“This creates opportunities for other companies to enter a specific field or make an ancillary or bolt-on acquisition that makes sense to them. We see opportunistic acquisitions by companies that see this low point in the market as the right time to make an affordable acquisition,” Du Toit says.
“In addition, companies are having more open dialogue about synergistic opportunities, such as transactions in which an adjacent property might be acquired to complement the company’s existing mining operations or they may feel the time is right to make an acquisition that fits in with their medium to long term expansion plans.”
The current resources climate has forced companies to focus on what assets are really core to their portfolio.
However, while a company may have decided that a mining asset is noncore in the context of its portfolio, this does not mean the company will sell at any price.
“The motivation for the transaction is there and that is always the first step in terms of driving transactions.”
She says the third level of investment does not involve any buying or selling but it does call for some often complex decision making.
“This is the capital allocations that companies make to expand their operations. A company that is looking for growth within its existing portfolio of assets will look at all those operations and decided which of its expansion opportunities it should fund.
“If the company has 10 operations, for example, in which it can invest, it is unlikely in the present environment to opt to expand all 10. Instead, it has to be selective about which projects it will invest in; looking at those projects that at this point offer the best potential return.”
She says this investment path very much depends on the company’s specific strategy as to where, how and when it makes those investments and which assets it opts to expand.
“We are seeing a lot more thought from mining companies about their capital allocation. In addition, the super-sized multibillion dollar capital projects that we saw at the peak of the commodity cycle have all but disappeared.
“A lot of companies have instead opted to reconfigure their expansion projects into more modest but scalable expansion projects.”
Rather than making huge upfront investments, companies are looking at those assets they can expand incrementally in line with market demand, making further investments as they are justified. “They will, for example, opt to build 4-million tonnes scalable to 8-million tonnes instead of building 12-million tonnes on day one.
“There is a lot more capital discipline and companies are carefully examining their capital profiles and considering how much capital they need to spend in the near, medium and long term,” Du Toit says.