Miners turn to bond markets for funding - FT.com

Miners turn to bond markets for funding

Mining companies are turning to the debt markets to fund operations and development projects, as volatile equity markets and caution on the part of lenders stem traditional sources of funding for the industry.

Sales of junk bonds by the mining sector, excluding coal and steel companies, are up almost 40 per cent so far this year, compared with the already-strong start to 2011, with Toronto-listed Inmet Mining, Thompson Creek, New Gold, and Molycorp tapping the market.

“In some of these cases, it is a case of nowhere else to turn. No one wants to raise equity at these prices and there is limited appetite from investors,” said John Turner, head of Fasken Martineau’s global mining group.

The FTSE All World mining index is down more than 35 per cent in the past year and equity raised in Toronto had fallen by about half to April, starving junior miners and explorers of a key source of funds.

“Without equity markets or traditional bank finance, companies are being much more creative about how they raise money,” Mr Turner added.

The biggest global mining groups, such as London-listed BHP Billiton and Glencore, have also in recent months sold bonds, locking in low long-term funding rates as the sector reduces its past reliance on bank financing. Investment grade bonds sales in the sector are up 90 per cent on last year, according to Thomson Reuters.

While well-capitalised, the big miners were selling bonds to pay back shorter-term bank debt as part of prudent balance sheet management, said advisers. Bonds also do not have the same restrictions, such as covenants, as bank debt, offering more flexibility.

However, recent market turbulence has caused some companies to pull back on bond sales, with HudBay recently shelving a $400m offering of junk bonds.

But more junior and midsized miners are expected to tap debt markets, if investor sentiment improves.


Most companies that have sold high-yield bonds have producing mines. But Martin McCann, partner at Norton Rose, said, “There are signs that interest is increasing among junior miners to fund exploration and that investors are becoming more receptive to those deals for the right return.”

“Certainly the banks are keen to see if they can get deals away. Clients often have to run a dual and even triple process with structures racing against each other so the client retains options if markets close mid-process,” he added.

Finland’s Northland Resources, which is expected to start iron ore production later this year, showed that Scandinavian investors will back earlier stage companies raising $350m in February.

Other companies have turned to hybrid or convertible structures, adding an equity sweetener to reach a broader set of investors. Gold miner Banro, which started production in Democratic Republic of the Congo last October, sold $175m of bonds with a warrant attached in March.

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