The mining industry has navigated the past nine months in better shape than most sectors, even with substantial capital market volatility and supply chain disruption.
Miners with exposure to gold and iron ore were boosted by high prices for these commodities throughout the year. Gold prices climbed by more than 25% over the past 12 months as investors flocked to the metal amid COVID-19 uncertainty. Iron ore prices reached six-year highs in August as global supplies tightened. Demand for minerals used in mobile phones and electric vehicles, like lithium, meanwhile, is forecast to triple by 2025.
Mining companies also entered 2020 in solid financial shape. Five years ago, miners restructured their balance sheets following the commodities price crash, which saw the market capitalization of the world’s 40 largest global mining companies fall by US$300 billion during 2015.
The industry reacted by prioritizing debt reduction, stepping back from headline-grabbing M&A and avoiding overly-generous dividend policies. Collectively, mining majors Anglo-American, BHP Billiton, Glencore and Rio Tinto reduced their net debt from US$79 billion in 2015 to US$39 billion at the end of 2019. These actions put the industry on stable footing, making it well-positioned to see out COVID-19 disruptions.
The industry has had its share of challenges, of course. Lockdowns in key producing countries like Brazil, Peru and South Africa, as well as weak prices for some commodities, such as copper, weighed on earnings. McKinsey forecasts scenarios that could see industry EBITDA fall between US$30 billion and US$120 billion from 2019 levels.
Mining leveraged finance issuance has been volatile throughout the year as a result. Leveraged loan and high yield bond issuance spiked up and down in North America and Western and Southern Europe, fell in Latin America and rose in APAC.
EBITDA forecasts, however, have improved materially from earlier in the year, with mining companies proving resilient. Leveraged finance is also just one of many financing options available to mining borrowers, who have found other sources of capital throughout the pandemic.
Indeed, the sector’s strong balance sheets allowed mining companies to access liquidity as required during the pandemic, with all financing options open to them.
Brazilian miner Vale, for example, drew down on its revolving credit facility in March 2020 and subsequently repaid an outstanding balance of US$5 billion on the facility in September. Others have been in such stable positions that they have not had to draw down on revolvers at all or have taken options to extend maturities. Rio Tinto, for example, did not have to use its US$7.5 billion revolver following the first round of lockdowns, and in September 2020, BHP Billiton exercised an option to extend its US$5.5 billion revolving credit facility by a year.
When miners have opted to raise additional finance, capital markets have been receptive.
In April, during the first wave of COVID-19 uncertainty, gold miner AngloGold Ashanti raised a US$1 billion bridge finance facility. In September, the group raised US$700 million in bonds, the proceeds of which were used to repay part of the bridge facility and pay down a US$1.4 billion credit revolver. FTSE 100 listed miner Anglo American, meanwhile, priced US$1.5 billion of bonds due at the end of March 2030.
Mining companies have also been able to source liquidity from specialist lenders offering alternative debt products, including royalty and prepayment credit lines.
Royalty finance provides mining companies with capital in exchange for an agreed percentage of future revenues. The financing comes with minimal covenants and does not oblige miners to make repayments unless they are producing and making revenue.
Prepayment funding, meanwhile, involves a lender purchasing precious metal byproducts from mine operators in advance, but at a discount. A community of alternative private capital players, including Orion, Triple Flag, Silver Wheaton and Franco Nevada, has been particularly active in the market.
These alternative providers emerged during the fallout from the 2015 commodities price crash, when miners found that familiar pools of capital—whether stock market equity or project financing from established banks—had dried up.
While capital markets eventually warmed to the sector again, many mining borrowers continued to take advantage of the available liquidity and flexibility offered by alternative mining finance providers. In a July 2020 White & Case survey of senior mining industry decision-makers, respondents signaled that the use of bonds in the sector may be reduced in favor of alternative funding.
Indeed, royalty and prepayment providers have been able to deliver tickets of increasing size, positioning their offer as a genuine alternative to traditional funding pools. In July, for example, Triple Flag provided a US$550 million upfront financing line, as well as other subsequent payments, to China Molybdenum for gold and silver production streams from its Northparkes copper and gold mine in Australia. The deal is believed to be one of the 10 biggest pre-payment streaming deals in the history of the product.
ESG a priority
As much of the world copes with a second wave of COVID-19, many in the mining sector are focusing on their environmental, social and corporate governance (ESG) credentials, which are expected to become increasingly important to securing institutional equity and debt financing.
In the White & Case survey, 13% of respondents cited ESG policies as the priority for the industry post-COVID-19, with another 12% citing ESG-related issues such as climate change response (7%) and the management and safety of tailings, a mining waste product (5%).
Some 14%, meanwhile, said ESG performance was the most likely factor to lure generalist investors to allocate capital to the sector, while 80% said ESG would play a greater part in investor decision-making.
Large mining companies, responding to investors and banks, have already moved to reconfigure their portfolios and divest assets to improve their ESG standings. BHP Billiton pledged to move out of thermal coal, Rio Tinto exited its last coal mine in 2018 and Australia’s South32 is divesting coal assets in South Africa.
COVID-19 may have had a relatively small impact on financing within the mining industry relative to other sectors, but a transformation is well underway as the sector positions itself for post-pandemic funding.