LONDON (Reuters) – A shortage of financing for small- and mid-cap miners from banks reluctant to lend, is providing “huge” opportunities for BlackRock Inc to invest in resources and reap high returns, the world’s largest money manager said on Wednesday.
Evy Hambro, BlackRock’s investment chief for natural resources, said there was an “incredibly acute” funding squeeze for single-project miners or miners in the late development and early production stage, as banks were simply refusing to lend.
Smaller miners or those with projects not yet in production typically struggle to secure cash in a downturn, but the squeeze has been particularly tough as an under-pressure banking system builds up capital buffers to defend against deteriorating market conditions.
The IPO market has also dried up, closing another potential avenue of accessing financing.
Hambro said many of these miners have been tapping BlackRock for capital, which the fund manager is turning into an opportunity to improve returns.
“There is this big reluctance by the banks to provide capital to those companies and if they are prepared to provide capital, it’s on very onerous (terms),” Hambro told reporters.
“We are going to give them that capital, we are going to help these companies to grow, but we are going to charge a lot more for that capital, simply because that capital is much more valuable right now.”
Hambro said his fund had the freedom under its mandate to invest not just in equity but in corporate debt, ordinary bonds, loans and even in private companies and royalties.
“It’s exactly the same as we were doing in 2009 when companies were looking to finance themselves … We saw a huge amount of convertible debt issues and we were a big buyer of that debt,” he said.
BlackRock has already been providing backing in this vein to companies like AIM-listed iron ore miner African Minerals , which borrowed almost $420 million at the start of this year to fund its flagship Tonkolili project. Tonkolili loaded its first iron ore shipment last month.
DEAL BOOM FOR MINERS?
Hambro said one outcome of the financing squeeze would be increased M&A — banks may be pulling back on loans to small operations but they continue to lend to the large players.
Weaker equity markets that have brought down valuations and optimistic long-term outlooks have all added to a potentially rosier background for deals.
BlackRock said the traditional buy-versus-build debate — one miners have when considering how to add to or renew their asset base — was moving increasingly against making investments in building projects from scratch.
“In my mind, equities today are a far cheaper way of growing your business than reinvesting into new assets, and with far (less) risk,” Hambro said. “There is the prospect for considerable levels of M&A across the mining space.”
The sector has long been waiting for an acquisitions boom as a result of weaker share prices. So far, a significant wave has failed to materialise but there are signs of more deals on the way, with Polish copper miner KGHM agreeing to buy Canada-based Quadra FNX for $3 billion on Tuesday and European Goldfields announcing it has received approaches.
Regardless of deals, however, big miners, with cash on their balance sheets, are facing pressure to return more to shareholders. Precious metals miners, for example, have typically seen payout ratios above 30 percent over the last decade — they are currently roughly half that.
“Mining businesses always need to invest in that asset base … but you need to balance that reinvestment with shareholder returns. The trouble is that balance has been totally out of kilter with the past,” Hambro said, adding companies were already recognising this.
“Shareholders are complaining.”
© Thomson Reuters 2011 All rights reserved