This has been a difficult year for many mining companies. 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. The most vulnerable are the companies with mining projects in the exploration and development stages without cash flow and which require capital to advance.
There are some practical steps, however, that mining companies can take to weather the current financial storm and prepare for the possibility of a challenging next six to 12 months.
The obvious first step is to reduce your burn rate in order to conserve your existing resources for as long as possible. A few areas to focus on are: terminating any non-essential exploration work; if possible, slowing down or shelving any mine or plant expansion plans unless they are key to your company strategy; postponing major hires; and considering ways of maximizing mine, plant and other business efficiencies.
Regarding financing options, 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.
If an equity financing is not realistic, a variety of other options may be worth considering, including: a commodity-linked note or preferred share offering; a commodity streaming or royalty transaction; a convertible share offering; a high-yield note offering; traditional debt-like offerings; and partnering with equipment suppliers and/or engineering, procurement and construction management companies.
There has been a significant increase in alternative financing transactions during the last 12 months. While each of these structures offers risks and negatives, they could be the source of the funds that help your company survive the current mining crisis.
The topic of re-evaluating your guidance may be a sensitive one. 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: assessing the current guidance quickly but taking the time to do it properly; being realistic; retaining third-party consultants if necessary; and updating the market with your new guidance as quickly as possible, but ensuring that you get the numbers correct 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.
Do not try to hide bad news — the current market would prefer realistic forecasts to unexpected surprises at the end of 2013
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.
Here, the key points companies should consider are: maintaining frequent dialogue with key shareholders so they feel plugged into management and have an outlet for their concerns; constantly tracking your shareholder list and any significant block trades; building a loyal but strong and independent board of directors; ensuring all legal and corporate governance arrangements are in place to permit the board to react quickly and appropriately if a shareholder challenge arises (e.g., advance notice and enhanced quorum bylaws); and, if faced with a potential proxy challenge, seeking legal advice as soon as possible.
The challenges many mining companies are experiencing in 2013 are serious and for some, a matter of survival. But by taking practical steps to conserve resources, identify alternative types of financing and manage shareholder relationships, companies can adapt to today’s environment and weather the storm.
— Based in Toronto, Robert Mason is a Partner at Norton Rose Fulbright. He represents issuers and underwriters on corporate finance transactions and M&A mandates, with an emphasis on mining and other natural resource sectors. He has extensive international experience, having recently led offerings by issuers located in South America, South Africa, Australia, the U.K. and Canada with projects throughout the world.
Norton Rose Fulbright is a global legal practice with more than 3,800 lawyers based in over 50 cities, providing the world’s pre-eminent corporations and financial institutions with a full business law service. See www.nortonrosefulbright.com for more information.