Miners facing capital dilemma

Mining companies are faced with increased capital risk – large miners from falling commodity prices and explorers from a lack of capital – exacerbated by an increased focus on short-term returns.

An Ernst & Young survey says capital allocation and access to capital are now ranked at the top of the risk list for miners globally, up from No.8 a year ago. These ”capital dilemmas” threaten the long-term growth prospects of the larger miners and the short-term survival of cash-strapped juniors, Mike Elliott, the group’s global mining and metals head, said.

Margin protection and productivity improvement were ranked the second-highest risk, up from fourth a year ago, the survey found, with resource nationalism dropping back to the third-highest risk, down from the highest.

Mining company management is ”being driven by the need to protect returns and manage the interests of varied and often competing stakeholders”, Mr Elliott said.

”This is in stark contrast to just 12-18 months ago when fast-tracking production was still top of the agenda and capacity constraints defined the key business risks.” For larger miners, the decline in commodity prices in 2012, cost inflation and falling returns have created a mismatch between their long-term investment horizons and the short-term return horizon of yield-hungry shareholders.

”Many years of high growth in earnings, cash flows and capital appreciation has attracted a different group of investors to mining, investors with short-term investment horizons who are not as comfortable with the sector’s longer-term, and often counter-cyclical, development, investment and return horizon,” he said.

”Shareholders with very short-term investment horizons do not seem to understand that … investing in growth is fundamental for the sector. This raises the question of how to balance the demands of short-term shareholders with those investing for longer-term returns. There is concern that the pendulum may swing too far, raising the possibility of another period of endemic underinvestment in new supply and resulting in future price volatility.”

At the other end of the equation, junior miners are cash-starved with their survival under threat, the survey found.

The original release of this article first appeared on the website of Hangzhou Night Net.

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