Banks are funnelling money to quality mining projects and M&A deals in a defensive move as the global credit crunch bites in other sectors, bankers and industry players said on Wednesday.
Plenty of funds were available at higher costs, though there was a lid on how much banks would lend to untested firms that were developing new mines or to ones operating in risky areas, the World Mining Investment Congress in London heard.
After the collapse of the subprime sector, banks were seeking other areas regarded as safer, and mining fitted the bill, with high metals prices and buoyant long-term demand expected from China and India, even if the United States and Europe fall into recession.
People flee the scene of the crime first, and then they look for other places to put their money, because there's still a lot of liquidity sloshing around the system, said Jeff Stufsky, managing director and global head of mining and debt solutions at BNP Paribas.
We're experiencing this ourselves, as a very active bank; there is an exceptionally strong appetite and capacity available for mining finance.
Banks, however, were only looking for top-notch projects with strong management and were avoiding high-risk areas, speakers said.
Strong projects were becoming rarer as the global commodities boom created a shortage of skilled managers and geologists, while projects encountered delays due to restrictions by governments, rising costs and environmental concerns.
For the first time ever, I have been getting calls from banks saying: 'Do you know of any (mining) projects to invest in?', which I have never known to happen. That just shows you that debt is available, said Michael Lynch-Bell, partner in charge of mining and metals at accountants Ernst & Young.
FUNDS FOR TAKEOVERS
There was also money available for takeovers in the mining sector, which has been resilient compared with other industries.
Whilst the $1 billion plus deals command the headlines, there was a rise in the number of deals of juniors buying juniors, midcaps buying juniors, etc. There were over 900 M&A deals in the sector last year, and we see that continuing in the course of this year, Lynch-Bell said.
Project finance available to the junior sector, however, was restricted, especially for start-up firms developing new mines.
You cannot provide billions of dollars to a junior where they've got no previous production, but you can consider $700 million projects, you can consider $300, $400 $500 million of debt, Stufsky said.
Banks are charging more, and Stufsky estimated that loans were costing around 20-60 basis points more than before the credit crisis.
More and more junior mining firms with no operating mines were teaming up with majors to finance new projects after hitting a brick wall in attempts to find loans, said William Bulmer, head of mining investments at the International Finance Corp, the World Bank's private-sector lender.
In the past they would have attempted to structure them as project finance transactions, but the costs for that now are just too high, so there's a move to finance them with a corporate structure, much more off-balance-sheet deals now for projects.
Some countries were virtually off the radar for funding due to political risk, such as the Democratic Republic of Congo, which is in the midst of a long-running renegotiation of mining licences.
Arthur Ditto, chief executive of Katanga Mining, aims to negotiate a credit facility of $550 million to help finance Africa's biggest copper and cobalt mine, but does not expect to conclude the facility until the middle of next year.
Right today, by and large, the DRC is not creditworthy, and until these mining reviews are reached and all these matters are in the rear-view, which I expect to be in the near future, it's not really a creditworthy place. (Reporting by Eric Onstad, editing by Will Waterman)
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