Money Morning Staff Reports
In the magical world of FinanceLand, it seems evil Dr. Doom has landed on the capital (Stall Street), and with a zap from his freezing ray-gun, has permeated the landscape with a thick layer of frost.
The effect: Traditional sources of financing – indeed, virtually every type of credit – have been placed in an Ice Age-like deep freeze. Facing a major crisis of confidence, banks underwent a 180-degree turn: Whereas they were previously almost force-feeding us loans, banks are now terrified to even include them on their menus.
If you are a company in search of bank lending, it basically doesn’t matter how good your cash flow, profit projections or even your balance sheet might be. It seems no bank cares whether you sell top-notch service skills, soft drinks, crude oil, or gold ingots. Not even tremendous government pressure, the promise of massive bailout outlays, or historically low U.S. central bank rates are enough to get credit flowing. Yet business must move forward. So deals are still getting done, but in non-traditional ways.
And no sector has shown a stronger ability to overcome this liquidity drought than the mining industry.
The Mining Sector’s Wild Ride
In the past few months, natural-resource players have gone on a $42 billion fundraising spree, in which every single dollar has come from outside the regular banking system.
Instead, investment banks have been busy raising fresh capital for the mining industry in truly a variety of ways. And in some cases, individual investors have taken things into their own hands.
Most of the action has been in the form of private-equity placements. Essentially, a consortium of investment banks agrees to buy an issue of shares at a fixed price (called a “bought deal”), and to resell those on the secondary markets to individuals and institutional investors. The issuer gets to keep the cash raised, minus fees.
For some, this action got started early. It’s as if they anticipated that these particular players predicted that the credit markets would morph into glaciers, and that accessing capital might become akin to melting an iceberg.
So let’s dissect a few of these deals to gain some clarity on the recent goings-on. We’ll start with the more traditional financings.
How Heavyweights Get Financed
Kinross Gold Corp. (KGC), the world’s fourth-largest gold producer, has also proven itself to be one of the shrewdest players, especially in recent months. Its first coup was the acquisition of Aurelian Resources Inc., in mid-2008, an all-share offer that transferred to Kinross Aurelian’s major gold deposit of 13 million ounces in Ecuador.
Then, this past February, as the broader U.S. stock indices were beginning another downward leg down toward multi-year lows, Kinross completed a “bought deal” offering, raising $400 million. And it didn’t even need the money. Or perhaps did, as Kinross recently announced a $150 million purchase of 20% of Harry Winston Diamond Corp. (HWD), to gain access to Winston’s Diavik diamond mine in northern Canada.
In a bought-deal offering, an underwriter (an investment bank, or a syndicate) buys securities from an issuer (in this case Kinross), before then selling the securities to the public. The advantage, during normal times, is that Kinross gets to avoid the so-called “financing risk” of the deal getting done only at a deep discount to the actual market price of its shares. And in a troubled market such as the current one, a conventional deal probably wouldn’t even get done.
Not to be outdone, the Saskatoon, Saskatchewan-based Cameco Corp. (CCJ), one of the world’s largest uranium producers, . The underwriters, led by two of the largest Canadian investment banking firms, raised about $460 million in the effort.
What’s more, in an unlikely coincidence, the CEOs of both Kinross and Cameco have recently stated publicly that there were highly attractive investment opportunities emerging among miners. The financial crisis that’s hampered the fundraising abilities of their weaker competitors has also depressed their share values.
Not surprisingly, healthy miners have begun circling like vultures.
Then, in an uncommon move of late, BHP Billiton Ltd. (ADR: BHP), the world’s largest diversified miner, raised $3.25 billion in global corporate bonds. Sporting a healthy balance sheet with a low debt ratio, Billiton’s genius tactic comes in a very low interest rate environment. So the company borrows cash with a low interest burden, and it’s not dilutive to shareholders. Meanwhile, its more-financially fragile rivals have to resort to outright asset sales of prized operations.
And most recently, AngloAmerican PLC (ADR: AAUK) divested its 11.3% stake in AngloGold Ashanti Ltd. (ADR: AU), a Top-Five gold producer. But, as Money Morning reported, rather than selling those shares into the market, AngloAmerican chose to sell directly to Paulson & Co. (a New York hedge fund), bypassing the markets altogether.
How Middleweights Get Financed
Mid-tier miners make up a small group that, for now, appears to be getting smaller.
Case in point is New Gold Inc. (NGD): This company’s current makeup comes from the early 2008 three-way combination of New Gold, Metallica Resources Inc., and Peak Gold Ltd. And, in order to accelerate growth, New Gold has just announced an almost-all-stock offer to take over Western Goldfields Inc. (WGW), allowing New Gold to conserve its healthy cash hoard.
How Lightweights Get Financed
Junior miners are an essential part of a long-term bull market in the natural-resources sector. But the business cycle – or the pesky credit crisis – still wreaks havoc on their best-laid plans. And when that happens, their ability to think creatively can allow them to swim rather than sink.
For these smaller players, the ones with promise of near-term gold production, or with existing gold mines, have the best shot at accessing capital. At the recently concluded Prospectors and Developers Association of Canada (PDAC) mining show in Toronto, the world’s largest mining-and-exploration conference, much of the discussion centered on financing.
In his presentation at the conference, mezzanine financing, and even mergers among junior miners, has to be on the table in order to advance projects.of who counsels companies seeking financing or advice on mergers, said that financial inventiveness is paramount. Options to be considered should include private equity,
Take, for example, two small mining companies, one focused on copper, the other on gold and silver. Both are top-notch, profitable and well-run, but were caught in the credit crunch. In each case, a (savvy) high-profile mining entrepreneur infused several million dollars in exchange for shares and warrants, allowing the business to return to normal activity.
So what’s the point?
While bank lending is at a virtual standstill, mining companies of all sizes have found ways to get financing outside of traditional credit markets.
The point of all of this is that deals are still getting done – even while people are spending less and saving more, and even though many investors are afraid to invest. But for the most-attractive deals, cash is finding its way out of pocketbooks, and into a few select coffers.
That money, quite interestingly, is overwhelmingly accessible to one sector: Mining.
Investors are courageously committing capital, especially in return for unsecured common shares, clearly expecting healthy returns in the coming years.
What we can gather from their actions is that the natural-resources sector is viewed as a huge opportunity, meaning it will be the focus of tremendous activity in the next few years, and can most likely count on support from healthy players and savvy individual investors.
Perhaps it’s a sense that the nasty thorn called inflation may be making its way into our sides sooner rather than later.
And informed investors know that hard assets, and tangible natural resources, have always provided the best protection against the ravages of the U.S. Treasury’s printing press.
Investors would be wise to follow their lead.
[Editors’ Note: To read a sidebar to this story, “If You Follow the (Smart) Money, Gold is Clearly the Smart Play,” which appears elsewhere in today’s issue of Money Morning, please click here. Also, watch in the next two weeks as Money Morning’s newest feature – investment quarterly reports
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Money Morning Special Investment Report:
Three Ways to Profit as Inflation Causes Gold Prices to Increase.
Money Morning Special Investment Research Report:
If You Follow the (Smart) Money, Gold is Clearly the Smart Play.
Bought Deal Offering.
Prospectors and Developers Association of Canada.