Mining companies globally are factoring in lower long-term commodity prices as leverage levels across the sector stretch balance sheets and trigger “a flood” of asset sales, says professional services firm EY global mining and metals transactions leader Lee Downham.

The company’s ‘Debt in the mining sector’ report, released last month, considers issues of liquidity, solvency and maintaining financial flexibility for large mining companies. It also includes an analysis of the historical financial performance of a cross-section of 88 large mining companies globally.

The report indicates that net debt has con-tinued to rise since 2010, despite earnings falling during the same period following the slump in commodity prices, and notes that this is the first observable period of such a disconnect between debt and earnings progression.

Downham tells Mining Weekly that, with net debt ratios at the highest levels since the turn of the century, leverage is increasingly stretching balance sheets and will limit flexibility to absorb financial shocks.

Therefore, mining companies’ management teams are focusing on the risks of leverage across the sector, he points out, adding that this has become significantly more acute in recent months through the large number of assets put on the market as companies try to raise capital and free up future cash commitments.

“While awareness of distress in the coal, iron-ore and steel sectors is most acute, distress in these sectors is not universal. The analysis high-lights that the fortunes of individual companies can vary widely.

“High debt metrics may be sustainable in the short term in certain circumstances, and conversely, low leverage may disguise impending risks which, if triggered, could generate a possible liquidity crunch,” he warns.

Additionally, EY Africa mining and metals transactions leader Quintin Hobbs tells Mining Weekly that a key South African mining sector to watch is platinum. Owing to the current adverse price environment and a “lower-for-longer” scenario increasingly more likely, companies’ liquidity and solvency metrics will remain under pressure.

He highlights that certain companies do have well-capitalised balance sheets, but there are others with significant levels of debt that have eroded their levels of financial flexibility.

Downham adds that market conditions are not showing signs of imminent improvement and warns that if this does not change, “only the fittest will survive”.

Mining and metals companies are considering every measure possible to free up cash and, therefore, retaining financial flexibility, creating long-term shareholder value by releasing and conserving cash, and positioning their operations today to capitalise on a future cyclical recovery should be “top of mind”, he states.

Hobbs concurs and believes that this would be the opportune time for companies to focus on survival in the short term.

Further, Downham highlights that traditional private-equity houses may now also be “running a ruler” over certain assets in the sector, joining mining-specific private capital funds in the hunt for acquisitions.

“The distress and complexity in the markets and the ability to unlock value in these assets using innovative financial structures are attrac-ting traditional private-equity to the sector,” he states.

Hobbs comments that, with the price expec-tation gap closing and levels of distress being higher, private-equity houses are certainly assessing the African mining sector more closely.

“Deal activity feels like it could increase in 2016, with a significant volume of assets coming to market. Private capital funds have been patiently looking for opportunities for some time, but until now, sellers have not had the burning platform required to force through a deal,” Hobbs concludes.