'Wall of debt' warning

Finance

In its latest report on the future state of the mining industry, Ernst & Young has warned that mining companies saddled with debt will have a severe impact on future supply growth and lead to higher commodity prices.

The report, Wall of Debt, tracked the performance of 63 of the world's top mining companies over the past 30 years, and found that companies were still burdened by debt.

“Debt levels remain a major concern across the mining and metals sector due to the dramatic levels of borrowing that occurred during the peak of the cycle in 2007/08” the report said.
As a consequence, the report goes on to say, the ability to finance the pipeline of new projects has been severely constrained, with the danger of a supply gap developing in several metals and minerals.

Lee Downham, mining and metals partner at Ernst & Young, said “we will see a return to equity as the major source of growth funding”. He added: “we also predict and increasing role for sovereign wealth and private capital, and possibly even a return to IPOs and separate listings for individual mine projects.”

The report goes on to suggest that more innovative financing and merger and acquisition structures will be required in the future.

“There is likely to be a return to equity financing for both acquisitions and new project development,” Mr Downham concludes. “Acquisitions by listed mining and metals companies will more often be proposed on the bases of all-share swaps, with little or no cash element involved.”