The well-publicised crisis faced by the mining industry has had a tangible effect on the practices of the lawyers who support it. A prolonged fall in community prices, weakening global demand and economic uncertainty in China has put huge financial pressure on the industry. Mining houses have been pushed into cost reduction, improving capital management and restructuring their debt. This has meant a serious decline in new project finance, capital markets and M&A work, which has been replaced by a surge of corporate restructurings and distressed transactions.
The decline of the global mining industry has been well recorded. PwC’s 2015 Mine report estimated that $156 billion has been wiped off the market value of the top 40 global mining companies, due to prolonged commodity price deterioration, while mining stocks have been slashed by around 43 per cent since 2010.
During this troubled time, firms have focused on increasing productivity while systematically reducing cost. Both large and small mining houses have been reviewing and improving operational excellence, deleveraging debt, and divesting themselves of non-core and distressed assets. The impetus for raising new debt for projects or for M&A transactions has been all but wiped away in the current climate. Recent industry data provided by EY reveals that M&A declined for a fourth consecutive year, with a 23 per cent year-on-year decline. Instead there is a far greater need to address balance sheets in the wake of such a prolonged downturn. The reality of the current climate was underscored in September when mining giant Glencore sought to raise $2.5 billion through a private placement despite the relatively low value of its shares. Critically, the equity raising is among a raft of measures that the company hopes will cut a third of its $29.5 billion debt pile.
There has been a fundamental reduction in both debt and equity capital market transactions, except in exceptional circumstances where debt needs to be restructured. The number of IPOs has dropped 94 per cent when compared to pre-crisis figures, according to EY, while the debt market has largely been preserved for high-grade borrowers. The lack of traditional types of capital raisings, especially equity, has prompted a broader search for new capital. Since the start of the commodities slump, mining companies have increasingly looked towards alternative financing options, including resorting to high-yield debt. For juniors who find the debt market more restrictive, creative solutions such as streaming, whereby mining companies are offered capital prior to mine infrastructure being built in exchange for an interest in future mine production, is becoming an increasingly popular method of financing. On the whole, practitioners report that legal work is adapting to place more emphasis on innovative instruments and finding restructuring alternatives for clients.
The growth of distressed and hostile M&A is another consequence of market conditions. Practitioners report an uptick in attempted hostile takeovers due to ultra-low valuations and the reluctance of companies to sell at this price point. Goldcorp’s bitter takeover battle with Osisko last year was just one notable exchange. The number of distressed sales has necessarily increased with mining companies struggling to pay off debt that has accumulated since the equity market dropped off. This has particularly been the case in the struggling iron ore and coal sectors.
Further uncertainty in the Chinese market is only adding to the woes of coal-mining companies. The country consumes almost as much coal as the rest of the world combined; as such, the coal industry relies heavily on China and reports that the country consumed 2.9 per cent less coal in 2014 is a further concern for coal companies, which have seen the value of their commodity fall 70 per cent over the last four years. Experts predict “a wave of bankruptcies” that seems to be already in full flow, with Walter Energy filing for bankruptcy in July, while another of the US’s largest coal producers, Arch Coal is attempting to push through a debt swap deal to avoid the same fate. However, the outlook is better for other base metals, such as, zinc, lead and copper, with experts expecting to see a recovery in the near future.
Investing in the mining industry has not been the traditional preserve of private equity firms but, in the absence of the public market, the alternative asset class is looking to fill the void. Last year private equity firms stepped up their involvement, investing over $2 billion in 50 reported deals. A half-year report by Berwin Leighton Paisner found that the market has built upon this promise in 2015, with over $1.76 billion of private equity funds raised from 61 deals.
Now there is impetus in the market observers are generally more positive about the long-term growth of private equity in mining. As opposed to shorter term capital market investments, a private equity fund can last for up to 12 years; short term capital is responsible for a number of issues in the cyclical mining industry that could be resolved by the more patient fund structures offered by private equity firms. Experts also point to the established status private equity firms have in the oil and gas sector as a parallel to what is currently happening in the metal and mineral sector. On the other hand, its role as a driving force of the mining sector has been tempered by the relatively limited pool of funds available to the size of the mining industry. Ultimately, while it is an important trend, the private market will not solve the industry’s financing problems.
The extent and the prolonged nature of the current commodities decline, combined with less than promising growth in China, has totally shifted the priorities of the mining industry. Law firms and practitioners are focusing on helping their clients through the crisis by acting on distressed and restructuring transactions, as well as advising clients on the best way to seek alternative methods of finance. Those with more diversified legal practices are faring better in the current climate, according to respondents, adding that pure capital market shops will most likely be suffering the most. Sources also point to the extra dimension of difficulties in relation to restructuring a mining company over a typical corporation, as well as the relative inexperience of restructuring among mining groups. For this reason, law firms that can offer a strong insolvency and restructuring practice along with mining expertise are well placed in this environment. In the short to medium term the legal market will concentrate on ensuring that mining groups can navigate the commodities decline, before the status quo can resume.