PDAC 2016: Canadian bankers ponder future of mining finance

Debt, balance sheet repair and available financing were the main themes of a panel discussion on capital markets at the Prospectors & Developers Association of Canada convention.

Since the early 2000s, the top-20 gold companies have seen their collective debt balloon from $6 billion to nearly $40 billion. And that debt burden doesn’t take into account leverage across the base metal sector.

Debt “is probably going to kill a few companies this time around, or at least take a few appendages,” Egizio Bianchini, co-head of the global metals and mining group at BMO Capital Markets, told a standing-room only crowd.

“That $50 to $60 billion in debt needs to be dealt with, or else companies by 2019 or 2020 will have gone bankrupt,” he said. “It doesn’t take a rocket scientist to figure it out, just look at the debt repayment schedules. It’s going to be an interesting dynamic this year between capital markets and asset sales.”

The Bay Street banker noted that the debt market is going to continue to be part of the mining industry, not to mention the debt that needs to be rolled over. “Companies that are in great shape are going to be able to roll over that debt, and even, dare I say, add on to it a little bit … the gold companies are going to be in relatively good shape, some of the base metals will have a little tougher go at it.

“The reality of this world is that interest rates are not going up because there’s more capital than brains — there are not enough places to put it, globally,” Bianchini said. “I’m a gold bug and proud of it, because if you look at all the money that has been printed on this planet over the last 30 years, there’s just too much of it. The reality is that interest rates are going to remain low. If you’re a good company and you’ve got a really good asset, and it is a long-life asset, and some of the gold companies have these, and some of the base metal companies have these, you’re going to be able to tap into a debt market that for the next 10 or 15 years is going to continue to be very cov-lite.”

Bianchini and his fellow bankers on the panel, Rick McCreary of TD Securities, Peter Collibee of Scotia Capital and David Shaver of RBC Capital Markets, agreed that companies with the best assets and management teams could raise capital.

“The really good assets will always attract top dollar,” RBC’s managing director of global mining and metals Shaver said.

“If there was a question out there as to whether the bank market is closed to the mining industry and new capital, it’s not,” Scotia Capital’s managing director and industry head of global mining and metals Collibee added. “The bank is not closed. It is very asset specific and company specific, but the bank is not closed.”

“Capital markets remain open to select companies to make select purchases,” he continued. “If the asset is of sufficient quality, it’s a good asset, and the bank is likely to lend. We have been extremely busy on many of these non-core asset sales … banks are prepared to lend money against very, very high-quality assets.”

Bianchini noted that while he has seen a general movement away from the mining sector among European banks, and in some cases banks in the U.S., Canadian bankers “have all stepped up to support the industry.”

“The Canadian banks are about supporting the industry,” he said. “We won’t do crazy things. But we view debt differently and we have a long-term view, whereas the bond market has a shorter-term view … the bond market is weighing in probabilities and not really factoring in optionality at all.”

As an example, Bianchini pointed to Teck Resources (TSX: TCK.B; NYSE: TCK), where some of the bonds got down to the mid- to low-70s, saying that “the bond market overdid that, certainly from a bank point of view.”

RBC’s Shaver added that there is a real dislocation between banks and bond markets. “Companies are aware of that, and that’s probably one of the reasons that few people are accessing the bond markets at the moment,” he said. “The bank credit spreads for many of the investment-grade borrowers are probably 2% or 3% interest rates, versus where the bonds are trading, which depending on who you are, could be, if you’re an investment-grade issuer, 5–8%, depending on the maturity, and if you’re a high-yield issuer, it could be in some cases north of 10%.”

Other sources of capital include private equity, which is putting some money to work in the space, foundations that are putting some money into the industry through management teams and royalty-streaming transactions, which have become part of the mainstream toolkit chief financial officers use to manage their balance sheets.

But the issue with a lot of the “new money” is the volatility, Bianchini noted.

“If you take traditional private equity, not the Resource Capital Fund or the Orions, but the traditional private equity guys, the big guys, they have struggled up to now for the most part because of the volatility and the inability to really leverage their investments … you’d find interesting views if you ask people if they think this new money will actually be deployed in a major way. We’ll have to wait and see. If the traditional equity market comes back, it will be irrelevant because that market will dwarf any private equity, and it looks at risks differently than the private equity and foundations have.”

Most of the panellists agreed that 2016 would see asset sales as debt maturities become imminent.

“While there’s a value arbitrage between one metal and another metal … we’ll see spin-offs or sales of companies that can trade at higher multiples,” Shaver said.

“If you look at it globally … there are going to be a fair number of asset sales, because the need is there,” Bianchini said, noting that there are four ways to deal with debt: asset sales; debt to equity swaps; real restructuring, where you actually deal with the creditors and new forms of capital; equity issues; and streaming.

“If the equity markets and the special streaming and conventional private equity put money into the sector, the asset sales will dry up, period,” he said. “Anglo doesn’t really want to sell all those assets it says it’s going to sell … it wants to get leaner, but it doesn’t want to sell them. But they have to. I’m sure Barrick didn’t want to sell Zaldivar. It’s a great mine, but they had to do it. I’m actually a bit optimistic about the equity markets and other forms of capital that I think it will mitigate some of the asset sales.”

As for high-end asset sales this year, Bianchini predicts they will be few and far between. “A lot of it, and unfortunately for us guys, it’s going to be the third  and fourth quartile, which will eventually get done, because those assets have to come out.”

For every company forced to shed assets, however, there is another company that benefits.

“This has been an unprecedented opportunity for people to take advantage and buy assets that would never have come on the market otherwise,” TD Securities’ deputy chair of investment banking McCreary noted.

“Supply has come onto the market and you’ve had demand from other companies looking to add to their portfolios. Notwithstanding the market, the valuations have been, frankly, phenomenal. It’s been quite fascinating to watch.

“Everybody believes our sector,  particularly on the base metal side, is gutted,” he continued. “But if you look at companies who have benefited from coming in behind, and I’ll use Lundin Mining as an example, they have picked up assets through this cycle and grown to be a larger company.

“Frankly, assets have just been moving around and moving around. There have not been the fundamental grassroots discoveries other than things like Oyu Tolgoi, and a couple of wonderful deposits that Barrick has. I’m not bothered by it. That’s life. That’s capital markets.”

The panellists also noted that for spin-outs, Toronto, with its dynamic capital market, is an attractive place to list, and forecast that some of these companies will migrate to Toronto.

“This market here is special in that we have regulators, we have intellectual knowledge here, we have great analysts, bankers, we have accountants, lawyers and some investors,” Bianchini said. “But the reality is that we’re only an hour flight away from New York. That’s where the real investors are, and so we have a unique opportunity here, and hopefully the TSX and all of us are going to encourage some of these companies that are to be spun out of an XYZ company to list in Toronto.”

Shaver added that he thinks the market will see more initial public offerings here and that there are going to be more companies this time next year than there are today.

McCreary of TD Securities also noted that, in many cases, selling assets creates fundamental value to the new owners who end up getting good-quality, well-run, safe and well-capitalized mines that were previously owned by a major.

For instance, if a mine in the portfolio of a major company that might rank 15th out of 25 in importance is sold to a company where it might be the first or second most valuable asset in the portfolio — that will create value.

“What has tended to happen is the new management team that has bought these non-core assets now go to the person running the mine and say: ‘OK, do you have any ideas of how you can better run this mine?’” McCreary said. “There is a lot of true fundamental value that has been created by putting these assets into companies that should own them, versus the larger companies, where they are not the focus.”