The volatile nature of commodities, the scale and political risk of mining projects and a two-tier capital environment has led to the decreased reliance on traditional financing mechanisms. As a result, it is expected that more junior and mid-tier exploration and production companies will turn to private equity (PE) to finance growth.
It is being stated that within the Australian mining industry “40% of companies in the junior mining sphere lack sufficient capital to see out the next six months.” Additionally, “75% of mining IPOs over the last five years are trading below their issue price.” With the landscape of PE evolving, mining and resources PE investment is becoming more attractive.
The PE industry is facing a competitive deal-making environment worldwide, with a large number of assets waiting to be sold and challenging capital raising conditions in 2013. However, the PE model can be perceived as a powerful catalyst for improving companies. Private equity firms have not traditionally been involved in mining but more and more firms are seeing the enormous potential and are looking for opportunities to get involved.
The “capital dilemma” relates to the short-term survival of cash-strapped juniors on one end compared to the threat facing the long-term growth prospects of the larger miners at the other end. Advanced juniors and mid-tier producers have been caught in the middle, “exposed to the act of balancing the thirst for yield and low tolerance of risk.”
The main challenge surrounding PE at the moment is investors seeking higher yields in a world of low investment returns.
Hear about this topical issue at the first ever Private Equity and Mining Conference to be held in Perth on the 23-24 September.