Finance will be available for sound mining projects – Newport

In a presentation in London, Don Newport of Standard Bank set out the problems in raising finance in current markets, but did see improvement ahead.

LONDON - 

Speaking at a Mining Finance Masterclass, organised by MinSouth, the AMA and corporate lawyers Simmons & Simmons yesterday in London, top mining banker Don Newport of Standard Bank gave a good sized audience the benefit of his views on the current lending and debt situation facing the mining sector.  While he pointed to difficult times ahead he did see some light at the end of the tunnel.  Standard Bank is one of the few banks which specialises in the natural resources sector as one of its key areas of interest so Newport's views carry particular weight.

"The reality is how banks see things." Said Newport in his introduction and then pointed to a number of reports on projects being cut back and put on hold (using a series of quotes from recent Mineweb articles as examples), which he reckoned were sowing the seeds for the next bull market.

He said that the following factors affected the availability of finance, but that it was still available for those which met some increasingly strict banking criteria:  Political Risk; Funding Mix; Resource and Reserve credibility; Commodities prices; Cost criteria (capital and operating) and perceived infrastructure needs affecting the ultimate viability of the project.

On political risk there was the prospect of adverse legislation changes in some countries and government interference damaging cash flows and that uncertainty spooks investors - presumably referring to banks too!

Newport did admit that with the state of current credit and equity markets the prospects of raising debt or equity finance was not really an option for many, or most, companies at the present and that there was both a disconnect between the commodities outlook and equities.  Indeed a disconnect from reality with share prices bearing little relationship to balance sheet assets in the ground and that many banks, which were not specialists in the sector, turning away from mining credit altogether.

In the current markets, Newport felt, it was important resources and reserves were sufficient to satisfy bankers' criteria for conventional project finance, and with the cost of additional drilling expensive, while most companies were strapped for cash and conserving what they had, that mining companies should reassess their projects and perhaps look at slow start options.

On the state of commodities markets he noted that the debt carrying capacity for many projects was seriously curtailed at current price levels and that with the current price volatility for many commodities bankers were uncertain where prices were going.  Forward market protection might be available with most metals in contango, but this may not be a long erm solution.  He did point out though that companies with in-the-money hedges already in place have been able to generate cash by unwinding these.

Capital and operating costs had been rising dramatically - up as much as 50 percent over the past 18 months in some cases - and while these may be coming down now, the decline is relatively sklow in impacting on projects.

The other major problem which can cause banks to deny lending is perceived infrastructure cost exposure, with large projects having to take on increasing responsibility fro infrastructure which would previously have been the responsibility of government.

On the positive side though Newport reckoned there were plenty of projects out there which remain fundamentally sound and that governments, which had been using high commodity prices to increasingly put the squeeze on mining companies, were now beginning to come to their senses and reduce some of these imposed burdens.  Commodity prices would improve while it is no longer so hard to find skilled management and workforces.  Capital expenditure pressures will reduce and lead times are reducing.  There are already signs of improvement in the markets and although they may be bouncing along the bottom there is an increasing feeling that now is the time to invest.

This improvement in perception will start filtering through to lending institutions, but it is important to keep to basics and look for funding solutions which will work in the current market.

He ended with the message that finance will be available for sound projects.  "Hang in there."

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