Mining equipment finance

Mining equipment finance

The Australian Bureau of Statistics has confirmed that after a pull back in exploration expenditure during the GFC, more money is being directed at mining than ever before - and now is the time to finance new equipment.

It is estimated that nearly $750m was spent on minerals exploration in the March 2011 quarter. The old investment adage that states to make money from mining you sell picks to miners is also ringing true, with significant purchases being made by the mining industry on equipment. The equipment is not all specialised (and definitely not as rudimentary as a pick) and as a result financing is available for much of the equipment that miners require.

Most successful miners today are aware of various equipment that they need to get the job done and being resourceful, they will plan ahead as well as work with financing groups to create access to the equipment they need to get the job done. The equipment ranges from the specialised equipment to get the commodity out of the mine itself, through IT&T, accommodation and catering, transport and a myriad of other equipment to explore, prove up, become operational and ultimately be working the mine.

"With the overall funding strategy for the mining company and equipment finance considered in isolation, the desired strategy will inevitably trip up a growing company at some stage"

By planning the required expenditure and working out what is needed, miners can work with a range of funders to ensure that capital expenditure is saved for items that just can't be funded. These highly specialised pieces of equipment tend to have limited resale ability and may cost too much to relocate - remember that a finance partner wants to work on a worst case scenario of having to get their money back by selling the equipment at market.

Just as some equipment becomes more specialised, so has some of the finance evolved. Different funders are financing different equipment in different ways and this has led to specialised financiers emerging to exploit various niches. Finance can be gained for everything from accommodation blocks to heavy equipment, and this is ensuring that miners need to raise less capital and apply the capital to other projects that will potentially generate new profits.

dozer2

Specialised equipment manufacturers are also working with miners and financiers to create equipment that can be financed. In some cases the manufacturers are hiring equipment, or even becoming financiers in their own right purely by packaging their equipment with a finance option.

Equipment finance also blurs in many instances - with the overall funding strategy for the mining company and equipment finance considered in isolation, the desired strategy will inevitably trip up a growing company at some stage. It is for this reason that any financial strategy needs to incorporate the aims and goals of the business, so that it will grow and contract as the business grows and contracts.

Financial strategy needs to incorporate the various methods of raising finance:

  • finance and operating leases
  • sale and lease-back
  • hire purchase
  • secured term loans
  • revolving loan facilities
  • guarantees and letters of credit
  • asset-based inventory financing.

While it may be possible to secure this from one funder, this poses an inherent risk. Typically funders don't tend to cope with too much change and as a result their version of how you should be growing versus your version will often create tension and sometimes result in funding lines not being available just when you need them. A strategy to overcome this is to use a number of funders - say three, and keep them focused on what you want them to be focused on. This provides a number of benefits:

  • doesn't expose any single funder to a potential greater loss
  • provides flexibility in that you have a working relationship with a number of bankers who will be able to help you
  • keeps them honest - meaning you should get reasonable rates

Clearly there are extra costs associated in managing this, however the risk of not doing this and having your funding pulled at the wrong time is a far greater risk. When combining the above with capital-raising, quite often you will find a very good balance between on and off balance sheet funding to improve the metrics of the mine.

With the speed of the mining business and the opportunistic environment that currently exists, it is imperative that funding strategies are worked and implemented in line with business planning. By getting ahead of the curve, you will not only ensure that you are prepared for any shortcomings, but also have time on your side to deal with the adversities that will come.