As with other aspects of the mining industry, the sheer scale of change in the outlook for capital programmes is truly astonishing. Prior to 2008, the financing issue was how to find the right capital structures in an environment of healthy operational cash flows, while a series of industry bottlenecks were impacting the miners’ ability to bring new supply on stream. Since the summer of 2008, the environment has been one of restricted access to all types of finance as the global financial crisis persists – from IPOs to any refinancing facility. In addition, lower commodities prices have significantly reduced operational cash flows and, therefore, the companies’ ability to self-finance capital programmes. It is on the demand side, however, where China’s post-Olympic industrial slump has hit miners the most, raising questions about the logic of bringing new supply into the market.
Due to differences in the scale and nature of their capex programmes, the downturn’s impact on majors, mid-tier producers and juniors varies; therefore they face different challenges. In addition, the cash flow positions of most juniors are weaker than those of mid-tier producers due to lack of sellable output, making them even more vulnerable.
Most majors have been cutting back on capital programmes mainly by delaying projects, but in some cases shelving entire projects. Although the capex cutbacks are mostly driven by the need to preserve cash, they are also the result of uncertainties in the short- to medium-term supply-demand balance. On the other hand, the crisis has presented miners, particularly the majors, with opportunities to review and reduce development costs as the slump in demand works its way through the suppliers’ value chain. Mobile equipment suppliers have been receiving requests for delayed deliveries and even order cancellations.
As for juniors, the majority of their capital programmes are subject to financing and therefore their challenges are even greater in the current financial environment. Most juniors have reduced development costs substantially and entered in to “hibernation mode” to weather the storm.
How PwC can help you
Mining companies face dealing with an extremely uncertain short- to medium-term environment, so finding the right balance for their capital programmes will not be an easy task. PWC is well positioned to help miners find this balance by focusing on:
PwC’s Global Mining group includes professionals across a broad range of technical skills, including valuation, strategy, performance improvement, corporate finance, taxation and transactions, with extensive experience assisting mining companies with complex issues.