LatinFinance - July 2013 - 46

Metals and mining

pointing to the fact that companies have started focusing on
period. Iron ore has also weakened and is expected continue to
costs, the element that is most in their control.
do so.
“It won’t be as easy to generate returns as they did in the
Part of that is down to increasing supply: copper and iron
past,” says Bormann. “They’re going to have to make hard
production is growing, despite demand slackening.
“We’ve seen high commodity prices and that’s what is needed decisions about whether to go forward with a project. In the past
it was easier. If you go forward, you’re not so assured of success.”
for investor and board approval for projects, so these are the
decisions that were made in 2003 to 2005,” says Jessica Fung,
Seeking cash
equity research analyst at BMO Capital Markets. “That’s why
we’re seeing the forecast for metal prices come down because all The comment could equally be applied to market funding
options. Miners have fallen out of favor with equity investors,
the supply is coming on [now].”
who are eying other sectors amid weaker commodity prices. The
That growing capacity has squeezed skilled labor and
bond market offers some opportunities. But even there, things
equipment supplies. In turn, that has clouded investment
are tough. In March, Compañía Minera Milpo tapped the bond
decisions, she says.
market. The copper and silver-producer has its flagship Cerro
“The higher cost producers are always the ones that will be
Lindo mine – which accounted for 53% of 2012 revenues – in
impacted first. They don’t have the cushion of margin as prices
Peru. Milpo sold a $350 million 2023 bond, which drew more
come down,” she adds.
than $1 billion in orders. The BBB–/BBB rated miner, majority
Miners have been under pressure from shareholders for
owned by Brazil’s Votorantim Metais, priced its international
the big-ticket spending on low yielding projects in recent
bond market debut at par to yield 4.625%.
years, says Gayle Berry, director of commodities research at
Proceeds from the unsecured notes were expected to
Barclays. Today’s pricing environment exacerbates that. “Miners
refinance $180 million in bank loans, and
have been planning on cutting capital
also go towards 2013 capex plans. Milpo
investment spending; that began in the
had signed a seven-year $80 million loan
middle of last year,” she says.
from Citi and Scotia last year.
That leaves companies such as
But success was not there for all.
Vena seeking other forms of financing,
In April, Peru’s Compañía de Minas
including private equity, which Vegarra
Buenaventura was heard to be preparing
says is becoming more prevalent. Vena
a cross-border bond of up to $500
itself had been in discussions in the second
million, which would also be its first
quarter to sell a $30 million stake to a local
Joe Bormann, Fitch
sale in the international markets. The
mining company. That fell apart in June,
largest publicly-traded miner in Peru took
when Vena announced it was in talks with
proposals for a transaction in April. The gold and silver miner
four other “interested groups”.
had been hoping to print a 10-year bond – with five or seven year
The company has also tackled expenses in other ways. In
tranches also a possibility. But a transaction did not materialize.
April, for example, the company issued shares to pay $158,000
Low funding rates in the bond market – and the knowledge
in trade payables, in a move to minimize cash outlays.
they may not last much longer – encouraged miners to look at
debt sales, say analysts.
Saving cash
With volatility in the bond markets making that financing
Large miners are also curbing spending as metals prices fall,
avenue tougher, private equity firms are gaining a higher profile
especially by scaling back investment.
as potential investors. Analysts report an increased private equity
Brazil’s Vale says the $18 billion it spent on capex and R&D
presence, saying they have spoken to such investors exploring
in 2011 will be the “peak expected for the foreseeable future”. It
trimmed spending in the area to $17.5 billion in 2012, and $16.3 the sector, though without specific targets. Considerations
include questions around whether the risk and time horizon
billion this year, saying “moderate” growth in global mineral
are attractive, they say. Unpredictable pricing could be an issue
demand called for a tougher focus on efficiency. Other big
mining firms, such as BHP Billiton and Rio Tinto, are also talking for private equity, which frequently relies on cash flow, as could
asset quality considerations.
of reducing costs.
Nevertheless, some have already made moves. GP
“On the major mining side, yes, there are mines to be
Investments increased its stake in Empresa Brasileira de
developed, but major companies will take their time on the
Agregados Minerais by 100 million reais in the first quarter,
build-out phase and watch out to not get penalized for writeto 164 million reais. And mining-focused private equity firm
downs and price issues,” says Vegarra.
Resource Capital Funds was reported to have taken a stake in
The past two years have been tough for all miners, who
mineral additives company Provale Indústria e Comércio.
have been reserving capex for only the most profitable projects,
Industry analysts point to KKR as another potential investor
says Joe Bormann, managing director in Fitch’s Latin America
in mining firms. The private equity giant, which has no direct
corporate group.
exposure to Latin companies or the mining industry, declined to
High levels of capex have accelerated write-downs over the
past year, leaving little room for error, explains Fitch’s Bormann, comment on its potential involvement in the areas.

“They’re going to have to make
hard decisions about whether
to go forward with a project”

46 LatinFinance

July 2013
LatinFinance - July 2013

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