For miners, credit taps haven't run dry Tue Oct 7, 2008 10:28am EDT By Cameron French TORONTO (Reuters) - Tight credit conditions have put the squeeze on miners that had hoped to borrow to expand or sustain their operations, but the recent examples of Teck Cominco (TCKb.TO: Quote, Profile, Research, Stock Buzz) and Equinox Minerals (EQN.TO: Quote, Profile, Research, Stock Buzz) show financing is still available for certain projects.
Equinox surprised markets last week when it said it had secured an $80 million loan to complete the Lumwana copper mine, which is currently under construction in Zambia.
Coming amid a global credit squeeze that has already derailed one major mining takeover and prompted some small miners to question how they'll survive the year, news of the deal suggested that while credit may have slowed to a dribble, it has not yet dried up completely.
"It's remarkable, I believe, given what's happening in the world," Kevin Van Niekerk, vice president of corporate development at Equinox, said of the financing deal.
Earlier last week, diversified miner Xstrata PLC (XTA.L: Quote, Profile, Research, Stock Buzz) halted plans for a $10 billion bid for platinum producer Lonmin PLC (LMI.L: Quote, Profile, Research, Stock Buzz), citing financial turmoil and difficult debt terms, while CEOs in the industry have said they see an end to big deals until markets recover.
Among smaller players in the industry, predictions have been more dire, with many calling for the number of junior miners to be pared over the next year as they run out of cash.
However, along with Equinox, there have been signs credit markets are not completely shut.
Canadian miner Teck Cominco (TCKb.TO: Quote, Profile, Research, Stock Buzz) last week was able to nail down $9.8 billion in financing for its takeover of Fording Canadian Coal Trust (FDG_u.TO: Quote, Profile, Research, Stock Buzz), while small player Moly Mines(MOL.AX: Quote, Profile, Research, Stock Buzz) secured $150 million in financing for its Spinifex Ridge molybdenum project in Australia.
"What this says is that for companies in production with current cash flow or in near-term production that are in the low end of the cost curves, they will get funding, because they are good projects, and debtors realize they can pay them back," said Mike Collison, mining analyst at Dundee Securities.
"For projects that are less robust, life is going to be tough."
NO QUICK FIX
Despite a $700 billion financial bailout passed in the United States and coordinated efforts by central banks, stocks markets have continued to plunge, suggesting investors see no quick fix for the financial system.
Falling base metals prices, meanwhile, have clouded the profit picture for mining companies, and made junior players with no production an even riskier bet.
"I believe it's all asset specific," said John Hughes of Desjardins Securities.
Equinox's Lumwana mine will become the biggest open-pit copper mine in Africa, producing 172,000 tonnes of copper annually when it hits full stride next year.
It was to open this summer, but was delayed by a fire at a power transformer, necessitating the additional financing.
Teck's takeover of Fording, meanwhile, will give it an asset that has seen a sharp jump in coal prices, and enjoys predictable earnings as prices are set once a year. Teck has said it will pay back about half of the debt through its cash flow in just over a year.
For Moly Mines, which won't see any output from Spinifex for another two years, the financing came at a price, as it had to issue warrants equaling 15 percent of the company's shares to subscribers, exercisable at a price of 1 cent each.
"That's really expensive money," said David Whetham, a resource fund manager at Scotia Cassels.
"If you have the ability to wait until markets are a little more receptive, I think that makes perfect sense for companies."
(Reporting by Cameron French; Editing by Frank McGurty)
AR1 Price at posting:
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