Ernst & Young's Global Mining & Metals Center reports in its latest quarterly Mining eye that AIM's junior members remained under severe pressure in the fourth quarter of 2008, with the Mining eye index falling by 46%. Despite scaling record highs earlier in the year, the index lost 75% over the course of 2008. A new and interesting trend emerged in the quarter, in the form of unsolicited offers from private equity firms, a trend that Ernst & Young expects to continue into 2009. The study concludes that AIM-listed miners are likely to continue to suffer distress this year, and that this is likely to lead to more de-listings. Market conditions will continue to affect debt and equity funding flows, which is likely to cause more cutbacks in spending across the industry. More casualties are likely, but the relative stability of the gold price should insulate the gold sector to a degree and gold mining companies should be able to raise capital.The study, which goes through a large number of AIM-listed companies one by one, notes in its conclusions how 2008 was a year of extremes, with historic highs and record lows, unbridled optimism and fathomless pessimism; boom and bust. The Mining eye index reached an all-time, five-year [sic] high in March, with high metals prices supported by broad confidence in the sector and at that point the miners were the darlings of the AIM sectors, having consistently raised significant sums of capital. By the fourth quarter of the year China, the Great White Hope of the natural resource industry, was showing slower rates of growth and metals prices were at levels that threaten the economic viability of all but the robust mines. The prospects of further falls effectively wiped out the investment attraction of exploration stocks, causing widespread, indiscriminate selling. The collapse in share prices inhibited junior companies' ability to raise capital or debt for exploration and development activities and by year-end the stock prices of almost half of AIM's miners - not just the small companies - had fallen by more than 80%. The study identifies a number of companies that came close to the end of the road and identifies the nature of the problems and the different approaches that have been taken to address the situation.Noting that AIM admissions in 2008 were just 114 companies, compared with 284 in 2007 and a peak of 519 in 2005, Mining eye reports that the value of companies listed at year-end declined by 61% in sterling terms to £37.7 bn, from £97.5 bn at the end of 2007. These falls are equivalent to US$193.5 bn to US$55.1 bn, a drop of 72% in dollar terms. A number of companies have stated their intent to cancel trading on AIM, although retaining a primary listing elsewhere. The major problems have been costs, regulatory burden and the difficulty in raising capital as far outweighing the benefits of maintaining a listing on AIM in the current market conditions.An interesting development has been the emergence of private equity investors seeking distressed targets. For example the specialist private equity fund Pallinghurst Resources acquired a majority stake in Platmin, in what the study describes as a well-timed rescue for Platmin, which was facing serious financial challenges at the time. Islamic Investment Bank, itself AIM-listed, acquired a 26% stake in Diamondcorp and a number of other companies confirmed that they were in early discussion. Some approaches have been somewhat opportunistic and have failed; in September a Hong Kong based fund launched an unsolicited, highly conditional take-over bid for Medusa Mining, which was abandoned two months later. Coal miner Polo Resources confirmed early in 2009 that it had received an unsolicited approach from another private equity fund. Other companies have announced that talks have been terminated without any clear offer forthcoming, showing how challenging the current climate is when it comes to executing a deal.The sclerosis in the financial sector is having a hard-hitting effect on exploration and development companies that do not have cash flow from sales and a very wide range of measures have been implemented - and the group comments that the diversity of measures that it has identified not only says something about the parlous state of the industry and the desperate state in which some companies find themselves, but also it attests to the innovative, committed and in some cases successful steps that companies have taken to weather these violent storms. Examples have included not just the scaling back or postponement of activities and putting operations onto care-and-maintenance, but, the disposal of non-core assets, capital restructuring, the pursuance of non-traditional sources of investment and other mechanisms.The study suggests that the scale and speed of the response among major mining companies to the financial environment must present some glimmer of optimism for the longer term, but that distress is likely to persist in the near term with capital markets likely to remain closed to explorers (and possibly some companies with operating mines and cash flow) and that these companies may struggle unless they achieve third party assistance. In summary, the number of delistings from AIM is likely to rise, either through going into administration, being taken private or consolidation. More unsolicited, potentially opportunistic takeover bids can be expected from private equity, venture capital firm and cashed-up competitors. One sub-sector stands out as reasonably well insulated from all this - the gold sector.
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