Transcript On-Screen Presentation

MINING
Surviving the Global Financial Crisis
in the Mining Sector
Session 3 – Understanding the Key
Indicators of Your Company’s Ability to
Weather the Storm
January 13, 2009
•
C
u
r
r
e
n
t
D
e
v
e
l
o
1
Agenda
• Introductions
• Broader industry and recent trends
• KPMG mining executive survey
• Cash is king
• Review of capital projects
• Flight to quality projects
• Mergers and acquisitions
• Know your partners
• Recent mining transactions
• Forecasting and scenario planning
• Stakeholder discussions
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
2
The broader industry and recent events
• Surviving the short-term problems will be trickier for some.
• Base metals have been more negatively impacted than precious metals.
• Junior exploration and development companies will be starved of capital.
• High cost producers in an environment of declining prices.
• There is a contrast between the short-term and long-term outlook.
• Many companies have halted production and have begun to defer
•
investment.
• Assuming companies can survive the next 18 to 24 months, the industry is in
the middle of a commodities super-cycle driven by demand from emerging
economies.
Companies that display best practices will emerge from this downturn prepared
to capitalize on upcoming opportunities.
• A significant reason for optimism is that the market fundamentals of supply and
demand still line up very well for the mining industry.
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
3
KPMG Canadian mining executive survey
• KPMG’s 2008 Mining Executive Forum asked attending executives to rate the
challenges facing mining companies. The results showed the following:
Challenges
Challenging
Neutral
Not challenging
N/ a
Cost escalation
78%
14%
-
8%
Scarcity of skilled labour
73%
18%
2%
6%
Energy costs
69%
16%
8%
6%
Capital costs
63%
22%
6%
8%
Ability to raise capital
53%
18%
20%
8%
Local stakeholder resistance
41%
24%
27%
8%
Regulatory issues
39%
35%
20%
6%
Government involvement in industry
39%
29%
27%
6%
Environmental standards
35%
29%
31%
6%
Access to new properties/ projects
35%
29%
27%
10%
M &A
29%
33%
22%
16%
Supply chain management
12%
45%
31%
12%
Other
2%
-
2%
96%
– The survey was compiled in
September 2008. We feel
that, given the current
economic environment,
executives may have given
higher priority to the ability
to raise capital.
Source:
KPMG 2008 Mining Executive Forum in Review
Note:
KPMG is aware that general economic and business conditions have declined sharply since the above
results were collected. KPMG believes that some executives may have answered KPMG’s survey questions differently
in light of current market conditions.
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
4
Cash is king
• The strength of a company’s balance sheet can be measured by management’s
ability to preserve cash. Some considerations include:
• Currency to use for operations – local currency or US dollars
• Hedging strategies for foreign exchange and interest rates
• Working capital management – collect customer payments quicker, stretch
•
suppliers and minimize inventory
Minimize commitments, renegotiate contracts and actively defer potential
contingent liabilities beyond the short-term
Opportunities to consolidate debt at lower interest rates
•
• Refinance or reposition parts of the company for sale
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
5
Review of capital projects
• Mining companies have to revisit projects that made sense when commodity
•
prices were high because they may not merit the same level of funding.
Different ways of evaluating projects could be appropriate such as a pay-back
method instead of IRR.
• Assumptions made when project plans were developed should be updated for
•
potential changes in fuel costs, labour and equipment.
A company’s cash flow forecast becomes important in evaluating short-term
versus long-term projects.
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
6
Flight to quality projects
• Companies are more likely to obtain financing for higher quality projects.
• High-cost and high-risk projects are being temporarily suspended or put on
•
•
•
long-term care and maintenance.
Mining investors are showing a bias toward companies that operate lower-risk
projects in lower-risk areas of the world.
Some countries such as China and Peru are creating mining friendly policies.
Others, such as Venezuela, are pursuing policies of resource nationalization.
Quality is impacted by other factors:
• Lack of effective rail, power, port and other infrastructure to streamline
operations
• Regulatory environment, permitting, political stability, tax environment
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
7
Mergers and acquisitions (1)
• The mining industry will continue to see high or higher levels of M&A activity,
•
but for different reasons.
In the last five years, acquisition strategies focused on:
• Large companies becoming larger, more stable through acquisition
• Larger companies were more attractive to shareholders and financiers
• Larger companies were better able to launch large-scale projects
• A new tier of “super major” companies (> $100 billion market cap) was created.
• State-owned mining companies from Brazil and China had a significant
influence in restructuring the industry.
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
8
Mergers and acquisitions (2)
• Stocks measured by the Toronto Stock Exchange’s S&P/TSX global mining
•
index were down 40% for 2008, with small players bearing the brunt of the
decline.
In the current economic environment there is even more pressure on mergers
and acquisitions.
• Gold companies and base metal companies with large projects in production
•
•
•
continue to generate cash flow.
Middle-tier companies with one or two projects run the risk of being driven into
negative cash flow by cost increases.
Junior exploration and development companies, with no revenue, may face
difficulties accessing equity or debt financing.
To avoid bankruptcy, middle-tier and junior exploration and development
companies may need to arrange strategic mergers or other arrangements to
raise funds and reduce costs.
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
9
Know your partners
• Recent announcements by mining companies of strategic partnerships and
•
M&A activity has boosted these company’s share price.
However, companies must assess the risk of new partners to the ownership
and management profile.
• Sources of funding could come from non-traditional sources such as Russia,
Japan and China.
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
10
Recent mining transactions
Recent mining transactions
Announced
24-Dec-08
Type
Buyer
Target
Private
Glencore Finance
(Bermuda) Ltd.
Katanga Mining Ltd.
100.0
placement
Amount ($m)
Target share price
Target share price
pre -announcement
0.35 CAD
post-announcement
0.41 CAD
15-Dec-08
M&A
Companhia Vale do Rio
Doce (Brazil)
Teal Exploration & Mining Inc.
(Canada)
150.8
0.60 CAD
2.85 CAD
21-Nov-08
M&A
HudBay Minerals, Inc.
(Canada)
Lundin Mining Corp. (Canada)
863.0
1.01 CAD
0.95 CAD
Lybica Holding BV
(Netherlands)
High River Gold Mines (Canada)
20-Nov-08
Private
placement
(1.43 CAD @ Jan. 8, 2009)
56.5
0.10 CAD
0.11 CAD
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
11
Forecasting and scenario planning
• Management of cash flows is becoming more important:
• the ability to accurately forecast 18 to 24 months into the future
• identify funding shortfalls well in advance
• build flexibility into the forecasting process through scenario planning
• run cash flow forecasts for each site and jurisdiction, be wary of consolidated
forecasts
• consider the tax implications of repatriating cash to the home country
• consider the implications of your corporate structure – the lack of tax treaties
between countries and the impact of possible withholding taxes
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
12
Stakeholder discussions
• It is increasingly important to keep the various stakeholders informed and limit
•
surprises.
Stakeholders include local communities, NGOs, environmental advocates and
lenders.
• Project suspensions can create new issues where good relations with
stakeholders can be a benefit to mining companies.
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
13
Presenters contact details
Lee Hodgkinson
Matt Tedford
KPMG LLP
KPMG LLP
Partner, Assurance
416 777 8351
Partner, Transaction
Advisory
[email protected]
416 777 3328
www.kpmg.ca
[email protected]
www.kpmg.ca
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
14