Analysis: Credit crunch may trigger mining mergers
September 10, 2008
By Jackie Cowhig and James Macharia
The global credit crunch is likely to result in more consolidation among junior South African mining firms, but all enterprises are feeling its bite, even Eskom, according to industry sources and analysts.
Fortunately for the mining industry as a whole, high commodity prices are providing a cushion against more expensive borrowing and soaring operational costs.
With international banks struggling under the credit crisis, liquidity is especially tight for juniors.
Gerard Kemp, the head of Africa's biggest private equity fund, the Pamodzi Resources Fund, says the fund has looked at about 90 opportunities in the South African coal sector, but they lack infrastructure or are too costly to fund.
Kemp says: "There are a lot of people on a lot of steroids out there … They have this huge expectation that everything is going to go up and generate huge returns. There's not a lot of money out there. Banks have stopped providing [credit] to mining companies, and if they do, it is very expensive."
Coal, iron ore, steel, chrome, and precious and base metals are extremely profitable for mining houses because prices are high - and set to remain high because the demand-fuelled commodity boom is far from over, say mining industry officials.
"If a large, diverse, established player such as Anglo [American] is looking for funding, that's not going to be difficult," says one mining executive.
Consolidation
Mining executives say financing for exploration - historically difficult to obtain even in times of easy credit - will become extremely difficult, if not impossible, for companies trying to get off the ground.
"Exploration is costly - hundreds of thousands of dollars for drilling alone," says another mining executive. "And you must be actively exploring, not sitting on your assets, or under the mining charter, you'll lose them. I think you'll see more and more small ventures … struggling to get going looking to partner with established players. We're already seeing that."
Larger players, and even some more acquisitive but established junior mining houses, are actively buying out black economic empowerment (BEE) mining companies that cannot afford to keep going alone.
Bernard Swanepoel, a director of consultancy To The Point and former chief executive of Harmony Gold, says that there are about 1 000 coal exploration permits and this is a clear basis for consolidation among juniors battling to raise funding.
But executives all agree that consolidation and partnering are necessary and will make the industry stronger.
"It's a way of adapting to the credit crunch, to cope with it," says one of the executives.
"There has been a kind of a coal rush in this country," says a chief executive of a BEE coal mining company. "There have been so many companies listing on the JSE, making very big claims about how much they're going to be producing, that have not produced one single ton. They are going to have some serious problems."
Coal is in the spotlight as a hot commodity in which to invest in the wake of the acute shortage faced by Eskom earlier this year and sustained export prices of about $160 (R1 200) a ton free on board at Richards Bay, compared with only $50 two years ago.
Swanepoel says: "Over the next 18 months, coal in South Africa is a no-brainer. If you are not playing in coal in South Africa, you'll miss out."
The big mining houses, such as Xstrata, BHP Billiton and Anglo, have committed to substantial coal expansion, mostly to supply Eskom's needs in the next few years.
Eskom feels pinch
But Eskom has also felt the effects of the credit crunch. The utility has not been able to raise as much as it hoped through bonds, and this week its credit rating was downgraded by Moody's.
Eskom spokesperson Fani Zulu said the downgrade had not entirely dampened investor interest, but would mean it could raise less cash from capital markets and would do so at a premium. Johan de Kock, the head of research at Metropolitan Asset Managers, said he was certain Eskom would still be able to raise the cash it needed.
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