This year has been a big struggle for the mining sector globally due to various complicated reasons such as softening commodity prices, falling share prices and significantly reduced financing opportunities have combined to create a crisis where survival is the key goal for many in the industry. Results show that the most severely affected companies are those operating within the exploration and development stages. These stages usually don’t have cash flow and therefore have to search for capital in order to make any progress.
Decrease your burn rate
This first piece of advice is an obvious one, decreasing your burn rate will allow you to save existing resources for much longer. This means you should dismiss any non-essential exploration work and if possible, slow down any mine or plant expansion plans unless you are certain that this is needed in order to achieve your business strategy. Additional approaches:
- Postpone major hires
- Consider ways of maximizing mine, plant and other business efficiencies
Unless you are close to production, it may be difficult to access the traditional equity markets at this time. Even if they are available to you, you and your board may not be interested in selling equity at the current dilutive market prices. If equity is an option however, it is essential that you avoid a marketed offering which would leave your share price open to considerable downward market pressure. Instead, you can push hard for a bought deal or perhaps even an overnight marketed deal, whether on a prospectus or private placement basis. You don’t want to compound any current troubles by having a marketed deal further suppress your share price. A flow-through financing could be a viable short-term funding solution given that it would likely be priced at a small premium to market price. Other Alternatives:
- A commodity-linked note or preferred share offering
- A commodity streaming or royalty transaction
- A convertible share offering
- High-yield note offering
- Traditional debt-like offerings
- Partnering with equipment suppliers and/or engineering, procurement, and construction management companies
There has been a significant increase in the prevalence of these types of alternative financing transactions during the last twelve months. While each of these structures offers risks and negatives, they could be the source of the funds that allow your company to survive the current mining crisis.
Re-evaluating Your Guidance
As commodity prices fall, capital expenditure and operating costs increase and construction plans slow, many companies are coming to the realization that their 2013 market guidance is no longer accurate. It is critical that companies manage this type of situation efficiently in order to avoid potential class action litigation or serious damage to their share price. Practical approaches include:
Assess the current guidance quickly but take the time to do it properly
- Retain third-party consultants if necessary;
- Update the market with your new guidance as quickly as possible but ensure that you get the numbers correct now to avoid a further update later in 2013;
- If your new guidance is contingent on a variety of unknowns, be clear to the market that your updated guidance is preliminary and subject to certain listed factors that could cause deviations as the year progresses.
Mining companies should always be prepared for the possibility of shareholder activism, especially in a down market. Proxy challenges are becoming a new reality in the mining world as shareholders and specialty groups see them as a cheaper alternative to M&A for taking control of a struggling company. Key points companies should consider are:
- Maintain frequent dialogue with key shareholders so they feel plugged into management and have an outlet for their concerns
- Constantly track your shareholder list and any significant block trades
- Build a loyal but strong and independent board of directors
- Ensure all legal and corporate governance arrangements are in place to permit the board to react quickly and appropriately in the event a shareholder challenge arises (e.g. advance notice and enhanced quorum by-laws)