Commodity prices and investment in South African mining will undoubtedly be impacted on by measures taken to curb the spread of coronavirus and the anticipated economic fallout, says advisory firm Moshe Capital founder and CEO Mametja Moshe.
South African mining operations, except for essential operations such as thermal coal mines that supply power utility Eskom and furnace and smelting operations, have been limited to care and maintenance activities since March 26, which will impact on production, while reduced mining activity on a global scale will affect commodity prices, she adds.
“Our mining industry will seek further investment after Covid-19 is conquered, with a view to attaining economic recovery. The standard ‘toolbox’ of funding mechanisms is always a good starting point, with the caveat that companies will need to be more innovative about how funding can be raised.”
Moshe explains that public bourses have experienced a bloodbath and are still difficult places to source any funding. Does this mean that mines cannot raise funding in this environment?
“We don’t believe so, and Sasol’s recent announcement of a $2-billion rights offer supports this. That said, raising public equity funding will be more difficult in the coming year as investors go after ‘safer’ assets, including resilient investments and jurisdictions. Rights offers may be attractive as they would not adversely dilute existing shareholders,” Moshe highlights.
She notes that development finance institutions are also going to be critical in this period.
The Industrial Development Corporation has taken the lead, with President Cyril Ramaphosa announcing a R3-billion investment in small and medium-sized enterprises.
A similar view might need to be taken to invest in mining operations by developmental finance institutions, whose investment criteria lean towards the retention and creation of jobs, economic and social development and sustainability goals.
Mines that want to access this funding will need to ensure that these criteria are met and weigh this against potential profitability and sustainability goals for their businesses.
Moshe further explains that, in recent times, traders have been funding mining companies on the back of their production. This method is becoming popular as it is seen as a win-win solution in the current crisis - miners need capital, and traders are then able to enjoy the upside in commodity prices.
“As we know, cash is king. Several companies across the globe, including Gold Fields, have announced that they can withstand the impact of the Covid-19 using internal resources and existing lines of credit.
“But can we find more innovation for funding mining companies?”
Having advised on some of the most complex mining deals in Africa, including advising Lonmin on its buyout by Sibanye-Stillwater, Moshe Capital’s approach is to focus on the fundamentals for inclusive prosperity in an innovative way.
“Mines should seek out pockets of cash earmarked for mining businesses. For example, we are a shareholder in Mining Minerals & Metals, a special purpose acquisition company listed on the LSE, which seeks to acquire businesses in natural resources exploration.
“Existing cash shells could provide an attractive cushion, particularly for exploration companies and junior miners,” Moshe notes.
She points out that internal sources of funding may include the disposal of noncore assets, but it is imperative to attract interest from the right acquirers if this is an appropriate course of action.
“In the past, we have identified and highlighted attractive cost or revenue synergies for potential investors, which has led to the successful disposal of noncore assets.
“These include combining contiguous mines which could increase life of mine; disposal of assets to benefit neighbouring mines from existing infrastructure; and disposals of plant and equipment – likely from our neighbouring countries such as Zimbabwe, Botswana and Namibia as they launch low-cost projects,” Moshe says.
She concludes that there is no catch-all solution in a tough market. However, miners will need us to all come together as advisers, funders, investors, government and other stakeholders to find innovative, unique investment solutions that contribute to inclusive prosperity.
“Perhaps this is what the Covid-19 pandemic is teaching us – to work together to find inclusive solutions as a united industry.”