Capital access and allocation risk threatens miners' future growth - E&Y

Published: 26 June 2013

Nearly every mining operation in Zimbabwe is currently hamstrung by working capital constraints, and efforts to focus on offshore capital markets are already hurt by risk aversion, said Ernst & Young's Mining and Metals Sector leader for Zimbabwe, Nqaba Mkwananzi.

Speaking at this morning's launch of Ernst & Young's annual Business risks facing mining and metals 2013-2014 report, Mkwananzi said Zimbabwe requires an estimated $6 billion to $8 billion in mining investment over the next five to eight years to restore and improve production capacity at existing mines. But that would be difficult to raise as capital allocation and access to capital are now at the top of the business risk list for mining and metals companies globally, up from eight in 2012.

The top ten risk list is as follows:

    Capital allocation and access
    Margin protection and productivity improvement
    Resource Nationalism
    Social licence to operate
    Skills shortage
    Price and currency volatility
    Capital project execution
    Sharing the benefits
    Infrastructure access
    Threat of substitutes

Mkwananzi said capital dilemmas threaten the long term growth prospects of the larger mines at one end of the sector and the short term survival of cash strapped smaller at the other end.

He noted that mining projects in Zimbabwe are small, hence exposed to stifling costs of production. "The government should consider the merits of promoting large mines that enjoy economies of scale and have greater access to capital markets."

Mkwananzi said the rising business risks were driven by the need to protect returns and manage the interests of varied and often competing stakeholders. 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 rapid decline in commodity prices in 2012, rampant cost inflation and falling returns have created a mismatch between miners' long term investment horizons and the shorter term return horizon of new yield focused shareholders in the sector. The sluggish share price performances of the sector also shifted the focus to returns through dividends.

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

Resource nationalism remains prolific around the world and continues to be a critical issue for mining and metals companies. Mkwananzi says increasing taxes and royalties, mandated beneficiation, government ownership and the restriction of exports continue to spread across the globe.

While more governments expect more of the sector there has been a significant retreat in capital investment as lower commodity prices are promoting a more cautious/conservative approach to large scale projects and risk in general.

"As resource nationalism has become more endemic, mining and metal companies have become better at managing this risk."

Mkwananzi said looking back at the past five years, six trends were evident. The six are prolonged rally in commodity prices, growth in project pipelines, chasing production growth, the rise of resource nationalism, a new class of investor and the importance of being socially responsible.
- finx

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