For Metals and Mining companies ...
Chief Financial Officers (CFOs) and Treasurers of mining companies have faced various market challenges and funding constraints in recent years, as spot prices have fluctuated during the recent global financial crisis. While access to capital is improving and commodity prices have a broadly more positive outlook with global demand rising, corporate treasurers must be continually mindful of ongoing fluctuations. In addition, continued political risk continues to increase as the debate continues on appropriate levels of royalty payments on extracted resources. Although strong demand continues for zinc, lead, aluminium, iron ore, copper and gold from rapidly developing economies, the outlook can change due to a range of factors including demand and supply shifts. Companies need to continually reassess their priorities, often making investment decisions with long lead times, whilst ensuring the business has sufficient working capital including access to alternative financing methods.
Financing Capital Projects
Mining companies must strike a balance between making long-term strategic investments and navigating short-term challenges. To achieve this, boards continue to focus on building greater flexibility into projects with CFOs seeking to minimise financing costs. This often involves tapping into alternative sources of funding, including commodity exchanges, Export Credit Agencies (ECAs) and supranational affiliates in key supply markets. Whilst traditional methods of project finance continue, Off-Take Agreements with industry participants are often required to ensure cash flow that is required by project financiers. To this end, traditional industry partners, commodity trading houses together with Chinese and Indian industrial steel mills, for example, continue to be prevalent.
Identifying, monitoring and managing risks inherent in large capital projects continues to be a key priority for CFOs. However, following the financial crisis, counterparty risk is of increasing concern. Furthermore, countries in often remote and volatile regions (e.g., parts of sub-Saharan Africa) rich in mineral reserves, are seeking to attract Foreign Direct Investment (FDI) that often brings heightened political and sovereign risk. This is resulting in some countries seeking to mitigate their own risk profiles by upgrading local mining conventions as an enabler for attracting greater FDI. Whilst remote yet resource-rich countries provide commercially attractive investment opportunities, the risk/reward dynamics accentuate the political, logistical and financial risks for the companies involved. To help understand these risks, CFOs need a global banking partner with an extensive network, in-country presence and industry-specific expertise across these regions, to benefit from their local market knowledge and cultural insights.
Commodity Price Volatility
As prices on many commodities tumbled during the financial crisis, many mines were left with unsustainable production costs and high capital commitments. Although prices have recovered and the long-term outlook is more encouraging, inventories continue to be monitored following continued price fluctuations. Developing economies such as Brazil, Russia, India and China continue their strong demand for raw materials as these countries continue to industrialise and develop. The introduction of Exchange-Traded Funds (ETFs) provides further stimulus to spot prices, requiring companies to continue their vigilance as they consider their investment plans and near-term working capital requirements.
Mergers & Acquisitions
Whilst some smaller and mid-tier companies have been forced to place marginal mines on care and maintenance, larger mining companies are better placed to drive economies of scale by acquiring productive assets as credit conditions ease. Many larger companies are now seeking opportunistic acquisitions, looking to develop new mines adjacent to existing assets. Furthermore, the relentless demand for energy continues to provide further policy stimulus, which potentially leads to more M&A activity as governments address their growing demand for commodities. Furthermore, acquiring mining companies need a banking partner to optimise their financial processes to enable businesses to be integrated effectively, leverage economies of scale, whilst ensuring a consistent approach to internal policies and controls. Looking ahead, there are a range of factors that are likely to result in continued growth in M&A particularly relating to proximity to infrastructure, industry consolidation, spare capacity and scalability opportunities.
The Citi Advantage
With over 100 years of experience in partnering with mining companies across the world, Citi is able to provide a unique set of solutions for each of our clients. Besides finance and product experts, the Metals and Mining group at Citi is staffed with licensed engineers and geologists to better integrate financial engineering with specific technical analysis. With 20 of 24 Global Forbes 500 clients amongst our clients, Citi has a long-standing commitment to supporting the needs and aspirations of CFOs globally.