TORONTO (miningweekly.com) – With anecdotal evidence pointing to a sharp increase in the number of insolvencies in the mining sphere in the last two years, market signals are pointing to things getting a lot worse before it gets better, John Sandrelli, a partner at law firm Dentons Vancouver says.
He told Mining Weekly Online in a telephonic interview from Vancouver that given the “very” challenging current market conditions, he had not seen much change for the better in recent months.
“We believe this will be a drawn-out market cycle, different than what we have seen before, and we believe the lull will last at least until the first quarter of 2014,” he said.
Sandrelli underlined the need for businesses to navigate this difficult time, which was characterised by slumping commodity prices, a lack of access to capital – especially for the small and medium-sized miners – and rising costs, by planning proactively and making deliberate, timorous changes to company structures, before it was too late to avert disaster.
He said there were a number of options available to companies reacting to danger signals, which could enable them to successfully emerge at the other end of the down-cycle as going concerns, with intact assets.
“We are seeing many companies not placing strategic assets into care and maintenance soon enough – before they run out of cash. This almost always has dire consequences for the company and its shareholders,” he said.
Companies sensing financial difficulties down the line could look at reducing capital spending to the minimum and preserving assets, which could be done by strategically placing assets under care and maintenance and waiting until the market had turned around before developing them.
Assets could also be sold to strengthen the balance sheet, or companies could look at debt to equity conversion, however, this usually tended to be highly dilutive to shareholders. Companies could also look at publicly traded debt as an option to restructure business.
Another critical tool at management’s disposal was to ensure that there is always a sustainable real cash flow available for at least one year ahead of time, which, if this was not the case, should be regarded as another danger signal.
“We have found companies tend to wait until it’s too late and only shut down operations when they have run out of cash, placing them in difficult and hard-to-negotiate positions. We are not seeing prudent asset preservation in practice,” he said.
When asked about whether the current market environment would change the way in which the mining industry was run, Sandrelli said that it was at this time too early to determine whether it would be the case.
One trend that did stand out, however, was that the role that equity markets traditionally played to raise funds could be changing, as companies sought creative new alternative sources of capital.
“Despite all the challenges, there are more options available to companies to survive this difficult period, if they plan ahead proactively,” he said.