Being strategic in resources: JVs remain key

Global mining deals outlook / March 2014

Joint Ventures (JVs) have been an important part of the mining industry for decades and have been instrumental to the development of many major resource projects. In recent years, JVs have taken on special significance given the restriction in availability of capital and debt finance, increased capital costs for projects, and greater complexity of mining projects in an environment of heightened commodity price volatility.

These factors manifest themselves in a few ways:

  • A reluctance by managers to commit to large mergers and acquisitions;
  • Difficulty in funding large resource projects, particularly those with commissioning risk;
  • Pressure to reassess the viability of existing or near term projects;
  • Renewed focus on cost cutting and risk sharing.

There is a de-risking taking place across the mining industry. Still, companies need to continue finding ways to grow their reserves and secure future production. Instead of all-out takeovers, many miners are collaborating through JVs. By advancing a project together, miners don’t have to assume all of the risks associated with making a full acquisition on their own. “JVs allow companies to share capital investment and project risk,” says PwC’s Global Mining Leader. “They can act to fill an exploration gap in a company’s business strategy.”

The reasons to seek out a JV vary and can include:

  • Mega projects where a number of parties share the financial and development risk;
  • Transactions being undertaken between companies with existing cash and funding capacity and those with quality development projects or existing production with growth potential; and
  • Investors (particularly in Asia) seeking to secure off-take agreements as part of their funding of an investment into a resources project.

Ideally, these arrangements feature each participant bringing particular expertise to manage specific risk elements and an allocation of capital that allows each organization to focus absolutely on what it does best.