JOHANNESBURG (miningweekly.com) – Cash-constrained diversified mining majors with frozen mine projects should revert to the once-common mining-house practice of floating off standalone mines on stock exchanges and raising cash for their developments as equity, says Ernst & Young global mining director Dr Tim Williams.

Williams, interviewed by Mining Weekly Online on the sidelines of the Terrappin African Mining Congress in Johannesburg, says that, with bank debt no longer available, some large credit-rated mining companies have been using the bond market to raise funds.

But all that some are doing with bonds is refinancing debt, and there comes a point when the creditability of a company is completely stretched and even the bond route is in danger of becoming over-used.

“There are many routes to raise capital, but the one route that people are not talking about now is the actual floating of the individual mines, and raising the cash for their development as equity,” Williams points out.

Williams says that raising equity for mines worked well in the past and recalls that, at one stage, there were 40 to 50 individually listed mines with their own sets of shareholders.

The pattern was for the mining houses to take the early risk of exploration, development, mineral licence procurement and the proving up of the projects. But, when it came to the development capital, the mining houses would then go to the markets and issue shares to the public in order to raise the capital to build the mines.

Currently, many mine projects that should be developed immediately, not only to meet expected future demand but also because of looming supply constraints, are being held in abeyance because of the non-availability of bank debt.

While a few diversified majors like BHP Billiton and Vale continue to be well-funded, several others are not as fortunate and have had to freeze projects.

“Many are actually licking their wounds a bit and, if they want to continue to grow, they are going to have to look at more inventive ways of financing, there is no doubt about it,” says Williams, who would like to see cash-constrained mining majors revert to raising equity funding on individual mines as a way out of their mine funding problems.

He recalls that this was the model that former Anglo-affiliate JCI used fund Rustenburg Platinum and Lebowa Platinum and he model used to finance so many gold mines. “Why not use it again?” Williams asks.

“I remember when we used to have full-page prospectuses, difficult to read they were, and you could subscribe to the shares out of the newspaper, and maybe we are going to go back to that,” he says.

The use of bank debt to fund mine projects only started to become a major factor in the last 20 years.

Since then, the amount of debt that the major mining companies have taken on is “quite astonishing and really staggering”.

“Bank debt has now gone, and even a lot of the leasing finance for the purchase of mining equipment has, to a large extent, also gone. A lot of the companies are also running out of their capacity to issue bonds, so that route is closing up, too. I am quite sure that, if the major mining companies wanted to go the route of rising equity for individual mine projects, that markets would be amenable,” he says.

During the Nineties, the mining industry swung away from listing individual mines and, in essence, the large mining companies became specialist resource banks, and to a large extent some, like BHP Billiton and Vale, still are.

Ernst & Young’s calculations found that the 60 biggest companies raised $75-billion each year in debt in 2007 and 2008, and most of that debt went into buying other companies.

Overwhelmingly, the debt was used for less on developing new mines than it was for acquiring other companies.

“But we are going to need a lot more mines, for sure. If the population growth continues and Chinese and Indian industrialisation continues, we are going to need more mines, but the big question is where is the money going to come from,” Williams adds.

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