Once darlings of the Australian mining boom, small and middle-tier prospectors are now running low on cash as commodities markets lose their lustre, pushing miners to look near and far for funds to keep afloat.
Seven out of 10 miners in Australia will need some form of funding within the next year, according to a survey by consultant Grant Thornton of firms with a market value of less than $500 million.
Some companies, already mired in debt, are venturing overseas for financing. Others are trying their luck in the capital markets, which have become more difficult this year.
"In Australia, the equity markets are broken," says Chris Tonkin, managing director of Perth-based Arafura Resources . "On the debt side we will be approaching sovereign funds, export credit agencies, as well as banks." Arafura, a victim of that cash crunch, is $30 million short of the $70 million needed to conduct a feasibility study for a rare earths mine. The project itself would cost $1.9 billion to build.
Tonkin says the door is still open for alternative financing via strategic investors, adding that there are many cash-rich individuals in China, Russia and the Middle East.
"Raising large amounts of capital by junior and mid-cap miners at reasonable valuations over the last 12 months has been challenging," says Tim Day, head of the Perth branch of UBS. "This has meant that a number of companies in the space have less funds than they may prefer." In January-September, the number of financing and capital-raising deals fell to 167 worth $14 billion, according to Ernst & Young's senior mining analyst Paul Murphy. That compares with 201 deals valued at $28.2 billion a year earlier.
That's bad news for miners who are already struggling with thinning profits and ebbing cash flow.
A Thomson Reuters analysis of 71 miners which reported annual results in June shows their free cashflow levels turned negative for the first time in 10 years. FCF measures the cash generated from operations after subtracting capital expenditure.
The analysis also shows the total debt for the 71 companies rose to $45.7 billion, the highest in at least a decade.
"The small cap guys have struggled massively since the global financial crisis" says Angelo Catalano, director at Chimaera Capital Markets. "Liquidity is very poor and banks no longer take on project finance risk on small companies." According to the Grant Thornton survey, 35 per cent of the companies polled hold less than $2 million in cash, while 29 per cent hold between A$2 million and A$5 million.
In the next three months, 22 pe rcent of the companies will need funding, 21 per cent within six months and another 25 per cent within the year.
Fallen from grace
Junior and mid-cap miners, once seen as leveraged investments, have fallen from grace as most commodities with the exception of gold retreat to levels near those seen in 2007.
As a reflection of their sagging fortunes, most of the country's junior and mid-cap miners, comprising 36 per cent of all Australian Stock Exchange listings, are now trading at steep discounts to valuation.
"The blip we had on commodity markets has put the scare in some lenders," Catalano says. "So you have names like Consolidated Minerals, Atlantic and Mirabela Nickel trading way below par because of project risks and also because of soft prices due to China." Sinking valuations are also threatening to slow mergers and acquisitions in the sector, with companies reluctant to market themselves too cheaply, some analysts and fund managers say.
"In the past when you look at M&A deals, a 30 per cent premium was normally sufficient for deals to go through," says Catherine Raw, co-manager of investment manager BlackRock's BGF World Mining Fund.
"But in the current market where companies are trading at significant discounts to NPV (net present value) but aren't in distress, boards of these companies won't even consider bids unless the premium is closer to 50-70 per cent," Raw says.
Gold in, coal out
Falling commodity prices are also realigning the stars in Australia's mining industry.
The most prominent change in a list of top-50 mid-tier miners is the emergence of gold producers and the exit of the once-dominant coal companies, according to PricewaterhouseCoopers.
The top-50 comprises 19 gold producers - up from 11 the year before. Gold miners make up 26 per cent of the sector's value.
This reflects a 142 per cent rise in the US dollar gold price - 90 per cent in Australian dollar terms - over the past five years, according to PwC energy, utilities and mining leader Jock O'Callaghan.
Traditionally, gold companies pay low dividends, relying instead on share prices rising to reward shareholders.
"The challenge for gold miners now is that they can no longer assume their shares are the best way for investors to be exposed to the gold price," O'Callaghan says This year's been a mixed bag in the stock market for Australian gold producers, underscoring the emphasis placed by investors on mining costs.
Evolution Mining is trading 32 per cent higher than its share price in January, while Northern Star Resources is up 86 per cent.
Meanwhile, Focus Minerals is down nearly a third this year.