Mining companies having to guard cash in unstable climate

AS THE cold economic realities of ongoing volatile and generally low commodity prices sets in‚ mining companies have realised that making and preserving cash is their No 1 priority – taking better care of their balance sheets.

According to the latest Top 10 Business Risks Facing Mining and Metals 2016-17 report from Ernst & Young (EY)‚ a multinational audit and professional services company‚ management of mining companies switched from investing for growth as their top priority through consolidation or improving project economics‚ to husbanding cash and keeping their balance sheets liquid without too much debt.

“After a very tough 2015 for the sector‚ in 2016‚ we see moderate global growth‚ dampened demand for commodities‚ prices lower for longer‚ and‚ very importantly‚ uncertainty and volatility.

“It is in this context the top business risks for the sector have changed from what we saw last year‚” said Miguel Zweig‚ accounting firm EY’s global mining and metals leader.

The immediate and traditional responses to rein-in costs in the face of falling commodity prices was to cut jobs and to suspend projects‚ but in an environment in which sustained price softness was expected‚ mining companies needed to find longer-term and sustainable ways to control costs‚ the report said.

Among the options some companies were looking at were curtailing travel expenditure and consolidating suppliers when it came to negotiating contracts.

In the list of business risks‚ securing capital was ranked in second place‚ one notch up from last year‚ with financiers increasingly more difficult to persuade to invest in the sector. Last year‚ capital raised by the sector fell by 10%, compared with the previous year‚ coming in at less than $250billion (R2.65-billion).

“Over the past 12 months‚ as the risk of default has increased‚ banks are only extending trade and long-term financing at an increased cost to those mining and metals companies with sufficient security to back the debt,” the report said.

An alternative method to raise capital is a system called “streaming”‚ in terms of which mining companies sell forward a percentage of their production at a discount to the spot price‚ securing upfront capital.

EY said there were 11 such major streaming deals last year, worth $4.2-billion.

Another way of securing capital for businesses was through the sale of assets. — BDLive