There were a number of notable highs and lows in Australia’s mining sector during 2016, including:
High-profile casualties: While the big miners such as BHP Billiton and Rio Tinto continued to battle away and saw significant growth in their share prices during 2016, there were some that were not so fortunate. 2016 kicked off with high-profile Queensland Nickel being placed into administration. Several months later, in April, Arrium followed. These situations could have possibly been avoided if critical issues were identified and appropriately addressed before it was too late, and restructuring advisors engaged earlier in the piece to assist.
Success stories: We witnessed the successful restructure and relisting of Triton Minerals Limited. Gold miners were able to raise material capital to further explore and develop projects (including previously failed mines), and in some cases commence production. In 2016, gold continued to be the safe haven.
Resilience of major players: Fortescue Metals slashed its operating costs, and gave the big miners a run for their money as to who was the lowest cost producer. Atlas Iron also continued to operate generating positive cash flow following its successful restructure.
Retreat of global heavyweight: Multinational mining company AngloAmerican announced it would look to offload its entire Australian asset portfolio and shed almost two-thirds of its workforce globally in a significant restructure to reduce burdensome debt levels. Having successfully closed a number of asset sales during 2016, AngloAmerican now appears to be rethinking its radical divestment strategy for remaining assets due to a tripling of the value of the metallurgical coal price during 2016.
Mining service providers doing it tough: Coinciding with the continued challenging mining market we witnessed mining services providers also doing it tough. Strategically we are seeing the informal restructure from both operational and debt perspectives of a number of key players (proposed Scheme of Arrangement for Emeco, Boart Longyear restructuring talks), including consolidation of business units. Critically, these parties have commenced addressing issues pertinent to the long-term survival of their businesses which has allowed them a greater opportunity to successfully restructure their balance sheet and operations before it is too late. Such consolidation can materially improve cost structures if the appropriate mix of businesses is able to be successfully consolidated as players can take advantage of synergies created from various segments including human, technological and capital synergies.
Cooperative lenders and creditors: Continued and increased willingness of lenders and creditors to engage restructuring advisors to seek to work with borrowers in financial difficulty and restructure debt facilities. In appropriate circumstances a further investment may be required to recover the original investment where upside to a project can be clearly demonstrated with acceptable risk levels.
Employment rate falling: Employment in the mining sector fell by 9% in the September quarter year-on-year (latest statistics available), and is expected to fall further as major projects transition into less labour intensive production phases.
Capital expenditure down: Capital expenditure was down 30% from 2014-15 to $53b in 2015-16 and is forecast to be 22% lower at $42b for 2016-17.
Exploration expenditure down: In 2016 miners’ exploration budgets dropped 16% to $1.2b compared to 2015. The 2016 spend was a 64% drop compared to the peak of $3.3b in 2012.
Exports rising: Exports rose by 32% year on year to December 2016, which is the fastest rate since June 2010, with coal exports up 127%. Imports were flat during this period. The lift in exports was driven by a sharp rise in both the volumes and prices of coal and iron ore exports.
Mining tax: The campaign by the big miners against the WA National Leader’s proposed hike in the rental fee paid by BHP Billiton and Rio Tinto from 25 cents to $5 a tonne of iron ore continues, adding uncertainty to the sector.
The global Trump factor: While the widely unexpected appointment of Donald Trump as US President momentarily stunned the market, global markets have generally moved positively since the outcome of the election. Time will tell as to how the impact of any new policies and perceptions around his leadership will impact global trading markets.
Pricing movements: Prices remained well below their mining boom peaks. However, most commodity spot prices are now higher than they were a year ago as displayed in the commodity price movements graph below.
Green shoots emerging: The above demonstrates that the mining industry still sits within a difficult period since the end of the boom. However, there are some green shoots with the resurgence of gold investment and a positive outlook for bulk commodities, such as iron ore and metallurgical coal, with increases in production forecast for 2016-17.
Innovation: Miners continue to explore innovation or new ways to control costs. Caterpillar is working on plans to retrofit the Komatsu 930E truck with autonomous technology, thereby enabling miners to reduce the costs of the existing fleet. Also, Rio Tinto and BHP Billiton are in a joint study to assess the viability of LNG-fuelled iron ore bulk carriers.
Government approvals: We are witnessing movement within government approvals. The WA government providing environmental approval for the Gruyere gold mine and signing a state agreement for the development of a $5.6b iron ore project in the Pilbara. The Queensland government, through a competitive bidding process, released approximately 58sqkm of land for coal seam gas exploration.
Given the current status of the mining industry outlined above, restructuring from both an operational and financial perspective will be critical for certain players in the market in the near-term. The following key factors will play a large part in whether a successful restructure and recapitalise can occur:
In 2017 we expect to see a continued focus by management to:
For some businesses, there may need to be some initial pain to benefit the company in the longer term to ensure its long-term survival.
How can we help?
Our team has extensive experience in restructuring and advisory in the resources and energy sector, and can assist clients in ensuring robust restructuring plans and strategies are in place to create future value for all stakeholders. Our clients can also benefit from our firm’s relationships with key participants across Australia’s mining industry.
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