An alternative form of permanent financing for a project is to secure the finance against the anticipated cash flows of the project. This means that the lenders are not relying on the company’s past performance in assessing the loan, not do they require the company’s assets as collateral. Instead, the lenders look at the profitability of the project and its ability to repay the debt. In this case, the project is separated legally and financially from the original owner, who is now called a sponsor, and the finance is structured to suit the needs of the project. This form of finance, called project finance, has found application in large infrastructure and industrial projects in both the private and public sectors.
As with other aspects of the mining industry, the sheer scale of change in the outlook for capital programmes is truly astonishing. Prior to 2008, the financing issue was how to find the right capital structures in an environment of healthy operational cash flows, while a series of industry bottlenecks were impacting the miners’ ability to bring new supply on stream. Since the summer of 2008, the environment has been one of restricted access to all types of finance as the global financial crisis persists – from IPOs to any refinancing facility. In addition, lower commodities prices have significantly reduced operational cash flows and, therefore, the companies’ ability to self-finance capital programmes. It is on the demand side, however, where China’s post-Olympic industrial slump has hit miners the most, raising questions about the logic of bringing new supply into the market.
Due to differences in the scale and nature of their capex programmes, the downturn’s impact on majors, mid-tier producers and juniors varies; therefore they face different challenges. In addition, the cash flow positions of most juniors are weaker than those of mid-tier producers due to lack of sellable output, making them even more vulnerable.
Most majors have been cutting back on capital programmes mainly by delaying projects, but in some cases shelving entire projects. Although the capex cutbacks are mostly driven by the need to preserve cash, they are also the result of uncertainties in the short- to medium-term supply-demand balance. On the other hand, the crisis has presented miners, particularly the majors, with opportunities to review and reduce development costs as the slump in demand works its way through the suppliers’ value chain. Mobile equipment suppliers have been receiving requests for delayed deliveries and even order cancellations.
As with other aspects of the mining industry, the sheer scale of change in the outlook for capital programmes is truly astonishing. Prior to 2008, the financing issue was how to find the right capital structures in an environment of healthy operational cash flows, while a series of industry bottlenecks were impacting the miners’ ability to bring new supply on stream. Since the summer of 2008, the environment has been one of restricted access to all types of finance as the global financial crisis persists – from IPOs to any refinancing facility. In addition, lower commodities prices have significantly reduced operational cash flows and, therefore, the companies’ ability to self-finance capital programmes. It is on the demand side, however, where China’s post-Olympic industrial slump has hit miners the most, raising questions about the logic of bringing new supply into the market.
Due to differences in the scale and nature of their capex programmes, the downturn’s impact on majors, mid-tier producers and juniors varies; therefore they face different challenges. In addition, the cash flow positions of most juniors are weaker than those of mid-tier producers due to lack of sellable output, making them even more vulnerable.
Most majors have been cutting back on capital programmes mainly by delaying projects, but in some cases shelving entire projects. Although the capex cutbacks are mostly driven by the need to preserve cash, they are also the result of uncertainties in the short- to medium-term supply-demand balance. On the other hand, the crisis has presented miners, particularly the majors, with opportunities to review and reduce development costs as the slump in demand works its way through the suppliers’ value chain. Mobile equipment suppliers have been receiving requests for delayed deliveries and even order cancellations.
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