Miners ‘have the resources to cope’ with coronavirus crisis
The scars from the last downturn have left the resources sector relatively well-positioned to survive the coronavirus crisis.
The scars from the last downturn have left the resources sector relatively well-positioned to survive the coronavirus crisis, with balance sheets across the industry in a far stronger state than in other major downturns.
But exploration and development companies relying on investors for fresh equity face months of pain as equity markets freeze for all but the best new projects.
Debt-loaded mining companies were left exposed during the global financial crisis, when the likes of Rio Tinto and OZ Minerals were pushed to the brink after gorging on debt to fund acquisitions. Andrew Forrest’s Fortescue Metals, meanwhile, faced a debt crisis in 2015 when iron ore prices tanked just as the miner’s borrowings peaked.
This time, however, the coronavirus outbreak has occurred when many of the nation’s biggest miners are carrying little to no debt. Miners have enjoyed solid commodity prices in the years leading up to the current crisis, especially in iron ore and gold, while management teams across the sector have kept a focus on keeping debt down.
More than a dozen Australian miners have more than $100m in net cash, according to Bloomberg data, giving them a comfortable buffer to endure any prolonged downturn.
Eddie Rigg, who runs boutique Perth investment bank Argonaut, told The Weekend Australian the current coronavirus outbreak was far less scary than the 2008 meltdown that led to the demise of Lehman Brothers and Bear Sterns and sent the world into recession.
Not only were miners entering the crisis in relatively good health, the response of governments around the world was likely to help drive demand for commodities.
And the oil price shock that rocked markets at the start of the week could lead to lower prices for diesel, which is the biggest single cost for many miners.
“This doesn’t feel anything at all like the GFC, when we didn’t know whether banks would collapse, whether the financial system would collapse,” Mr Rigg said.
“With this one, we’ve got stocks coming back to good buying levels and with the stimulus that’s been put into the marketplace you can see a boom market for resources in the next couple of years.”
While many of the biggest resources names are carrying little to no gearing, there are exemptions at the smaller end of the market.
Gold producer Dacian Gold and nickel miner Panoramic Resources are carrying debt at time when both companies have struggled to deliver on the start-up of their mines in Western Australia.
The lithium sector, meanwhile, was under immense pressure even before the outbreak, with those miners carrying debt, such as Pilbara Minerals and Altura Mining, struggling to manage amid weak lithium prices.
Companies that were aiming to raise money to develop new mines, Mr Rigg said, were “in a world of pain” due to equity markets now being all but closed to large-scale equity raisings.
Those limited capital raising avenues, coupled with the balance sheet strength among most of the established miners, meant there was a good chance that mergers and acquisitions would start to flow.
Among the companies sitting on large amounts of net cash are IGO and Mt Gibson Iron, which each have just under $400m sitting on their balance sheets.
Another investment banker to the resources sector, who could not be named, said the current crisis vindicated the conservative balance sheets that many companies in the sector were carrying.
“This reminds us again that if you are a miner, you don’t gear your business too much even though the financial returns of doing so may be theoretically quite attractive,” he said.