Paul Knight, Toronto-based Global Co-Head of the Mining & Metals at Barclays, says low prices and high debt are going to force consolidation in the gold and coal sectors in 2015.
By Paul Knight
This year is likely to be marked by M&A and restructuring as well as very selective equity raising in parts of the global mining industry. That’s particularly true in the gold and coal sectors, where some companies took on too much debt for expansion in optimistic times will have to sell assets or raise equity in order to survive continuing lower prices.
The challenge affects both thermal and coking coal companies – and in the US may well see some companies being restructured. In the gold sector, the issue is global and some companies are going to have to sell assets or raise equity. There are gold companies that tried to grow on the back of high gold prices but because of generally declining production and too much debt they cannot generate free cash flow at current gold prices. There is considerable pressure to reduce gearing and focus on tier 1 assets, but this is easier said than done. These are the hard questions being asked in boardrooms around the world.
The markets are also making sharp distinctions between those companies with strong management teams and track records, tier 1 assets and prudent debt levels, and the rest. The former may seek to take advantage of this moment to optimise their asset portfolio.
The situation is fundamentally better in some base metals such as copper, nickel and zinc. The middle and long-term fundamentals are good, and there is a real scarcity of actionable tier 1 assets so M&A activity is likely there as well.
