Mounting Debt Leaves Mining Sector in the Lurch

28 October 2009 (Last Updated October 28th, 2009 18:30)

Mounting debt in 2007 and 2008 due to the steep rate of borrowing by the global mining and metals sector has caused a number of mining companies to restrict capital investment and worry about debt repayment, according to a report by Ernst & Young (E&Y). The analyst firm says deb

Mounting debt in 2007 and 2008 due to the steep rate of borrowing by the global mining and metals sector has caused a number of mining companies to restrict capital investment and worry about debt repayment, according to a report by Ernst & Young (E&Y).

The analyst firm says debt is likely to affect the entire industry as it struggles to condense the supply gap.

Borrowing from 2005 to 2008 put the mining sector in extremely high debt, especially with the downfall of earnings through the period.

Since the second quarter of 2009, however, a recovery in metals and mining prices meant the share price of mining companies increased.

E&Y said this shows debt levels are slowly coming under control and that there will be strong demand for metals and minerals in coming years.

Valuations, nonetheless, are still far less than the peak levels of 2008.

In the long-term, debt repayment remains a major concern with the supply of metals and minerals being cut back.

Effects of repayment include restrictions on capital expenditure for new capacity, greater risk perceptions and a higher hurdle rate for the returns on new projects.

Major and junior mining companies have considerably decreased exploration expenditure and access to debt remains difficult to attain.

A return to equity coupled with innovative transactions less dependent on debt financing is viewed as key elements for growth funding, according to the E&Y report.