Australian miners face a funding squeeze in the second half as the local dollar’s strength and slumping commodity prices drive investors away, said Goldman Sachs Group Inc.
“If the opportunity to raise capital is available it may be prudent to look at that option rather than risk that window closing,” said Anthony Miller, Sydney-based head of Goldman Sachs’ financing group for Australia. The Australian dollar’s 46 percent climb against the greenback since the end of 2008 is crimping mining profits, making investors less willing to subscribe for share sales, he said.
Resources companies raised $519 million from share, convertible bond and rights offerings this year, down 74 percent from the same period of 2012, according to data compiled by Bloomberg. The S&P/ASX 300 Metals and Mining Index has lost A$70 billion ($72 billion) in market value over the past year as slowing growth in China, the South Pacific nation’s biggest trading partner, spurs a decline in commodity prices that’s not being matched by a lower Australian dollar.
The so-called Aussie bought $1.0267 as of 12:30 p.m. in Sydney, holding above $1 for an unprecedented 10-month streak.
Resources companies are doing “anything they can do to reduce their cost base and protect their cashflows,” including pulling back on spending plans and selling assets, Miller said in a phone interview. “We are discussing with clients that yes you should, where you can, reduce your discretionary capex, sharpen your cost of production.”
The currency’s strength is deterring all but the largest foreign investors from providing funds to Australian mining companies, said Miller, who heads the investment bank’s local equity and debt capital markets, leveraged financing and risk management businesses. KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, is considering a bid for Rio Tinto Group’s stake in the Northparkes copper and gold mine in New South Wales valued at about $800 million, two people with knowledge of the matter said last month.
Goldman Sachs has a 7.8 percent market share in arranging international debt for Australian and New Zealand companies this year, ranking fourth, according to data compiled by Bloomberg. The bank ranks sixth for arranging equity and convertible note issues in the nations, behind UBS AG, Deutsche Bank AG, Bank of America Corp., Macquarie Group Ltd. and Credit Suisse Group AG, the data show.
“There is a lot of debate amongst corporates” about capital raising plans, Miller said. “When a couple move to raise capital, the market often speculates that others may also need to raise as well and there is a risk it becomes self fulfilling.”
Most vulnerable to a capital shortage are companies with a high cost base, small or old operations, and firms caught off guard by the disconnect between the Australian dollar and commodity prices, Miller said. Most resource companies have been more diligent about protecting cash flows than in earlier cycles and are better prepared for a downturn, he said.
More than 150 Australian mining companies had less than $1 million of cash on their balance sheets as of their most recent regulatory filings, according to data compiled by Bloomberg.
Waning global demand for commodities is prompting producers of everything from gold to coal to trim assets and staff as they are squeezed by unfavorable foreign exchange rates, falling prices and increasing costs.
BHP Billiton Ltd., the world’s largest mining company, has offloaded $5 billion of assets including selling the Pinto Valley mine and railroad in the U.S. to Vancouver-based Capstone Mining Corp. for $650 million in cash. OceanaGold Corp., the Australian producer, is considering suspending some operations in New Zealand.
Linc Energy Ltd. raised $200 million in convertible bonds to pay down debt in March, helped by Credit Suisse, in the biggest such raising from Australia’s mining industry this year, Bloomberg-compiled data show.
Goldman Sachs last month correctly predicted a sharp fall in the price of gold, which fuelled a rout that included the biggest two-day slump for the precious metal in three decades. The bank’s analysts estimate the cheapest listed company in the space is Melbourne-based gold producer St. Barbara Ltd., which last month lowered production forecasts after raising $250 million in five-year secured debt. Its stock has fallen 60 percent since Dec. 31.
Spot prices for aluminum, copper, lead, nickel, zinc, and gold, have fallen this year driven by concerns sluggish economic growth will undercut demand.
“The issue is that if companies in most need of raising capital don’t provide a pathway to recovery, or if their only way to survive is to wait and see commodity prices go back up, then there are a lot of other less risky places for investors to take that same exposure,” Miller said.