Capital Markets Starting to Thaw for Miners: Bankers

  • Equity raises, streaming, M&A seen picking up amid price rally
  • Between $50 billion and $60 billion needed to stabilize sector

The biggest rally in mining stocks since the aftermath of the financial crisis is opening the door for producers to return to the equity market in their ongoing battle to reduce debt, according to bankers in Toronto.

While the Bloomberg World Mining Index retreated on Tuesday, it surged 16 percent in the past month, the steepest four-week rally since August 2009. Metal prices have also rebounded, with gold up 19 percent this year. That shift in sentiment may mean that a pickup in equity deals this year will accelerate.

“We’ve all seen, thankfully, a much better start to 2016 than we saw at the end of 2015,” David Shaver, managing director of mining and metals at RBC Capital Markets, told the annual PDAC convention Tuesday. “Capital is beginning to flow back into the mining sector.”

Miners raised $5.6 billion globally in equity markets in the first two month of 2016, compared with $1.4 billion in the final two months of 2015, according to data compiled by Bloomberg.

Gold Focus

Still, investors are being very selective and primarily focused on gold, he said. Money is coming mainly from traditional mining investors rather than generalist portfolios, Shaver said during a panel discussion. Bond markets remain virtually closed, he added.

“The money that is flowing in is names they already know -- larger companies with lower costs, better management teams,” he said. “Capital is very focused on the top end right now.”

The industry has a long way to go in its deleveraging efforts.

Egizio Bianchini, co-head of the global metals and mining group at Bank of Montreal, estimates $50 billion to $60 billion is needed to stabilize the industry after the commodity price rout.

Producers have been doing what they can to address that debt burden over the past few years through asset sales, refinancing, equity raises and so-called streaming deals. More probably will have to be done this year as market conditions and investor sentiment shift, Bianchini said at the same event.

Streaming companies such as Franco-Nevada Corp. offer a bit of a lifeline for miners because they are able to tap the equity markets themselves and inject capital, said Peter Collibee, head of mining and metals at the Bank of Nova Scotia

Streamers give miners upfront payments in exchange for the right to buy metals at a discount in the future, and until recently, had been vocal about running out of cash to invest. Franco-Nevada raised about $920 million in equity last month.

"If you go back not that long ago, people were saying that streaming companies had tapped out their resources," Collibee said. “That’s no longer the case.”

M&A Prospects

The early signs of recovery in commodity prices could also give miners the confidence to pull the trigger on more mergers and acquisition, said Rick McCreary, deputy chairman at Toronto-Dominion Bank.

“M&A over the last three years has largely been portfolio optimization; moving the same assets around," McCreary said. “It feels now that things have changed. If you look anecdotal through any cycle most of the M&A occurs between the trough and the peak”

That’s when buyer and seller expectations start to align.

“It’s feeling like it is now,” he said.

(Corrects to remove reference to mining industry debt in eighth paragraph.)
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