Already battling tough mining conditions and a price slump, a clutch of west Africa iron ore miners are being plunged further into difficulties by the outbreak of the Ebola virus in the region.
The combined effect of the health emergency and the depressed iron ore price makes a grim backdrop for UK miners, including London Mining and African Minerals, to solve acute financing problems.
Shares in small west African iron ore miners have been some of the worst performing in the mining sector this year, diverging sharply from the likes of Rio Tinto even though their much larger rival also depends hugely on the steelmaking commodity.
London Mining shares fell 13 per cent on Thursday, extending their fall this year to more than 68 per cent, after the miner said the outbreak of Ebola would hamper operations in Sierra Leone. It cut its output forecast and warned of a deeper impact if the spread of the virus worsened.
Panmure Gordon said this week that Ebola “poses a very real short-term risk to mining companies operating in west Africa”, citing concerns over miners’ ability to deploy key staff and contractors. ArcelorMittal, the steelmaker that mines iron ore in Liberia, said this month that contractors working on an expansion project had declared force majeure and were moving people out of the country, forcing it to suspend work.
Even before the outbreak worsened, west African iron ore miners were struggling. Like London Mining, African Minerals, which also mines in Sierra Leone, and Bellzone, which operates in Guinea, are searching urgently for funding. Shares in both companies have fallen more than 80 per cent this year.
The slump in the iron ore price has put the balance sheets of African Minerals and London Mining under “significant pressure”, said analysts at Macquarie, saying the miners were “close to the edge of the precipice”.
This month London Mining agreed $25m of working capital with two banks, maturing by the end of the year; while African Minerals was allowed by Shandong Iron and Steel, its project partner, to draw on $284m, hitherto ringfenced for a mine expansion, for working capital.
Part of Shandong’s price was a request for new leadership – with African Minerals changing chief executive for the third time in the past two years.
Bellzone also this month struck an agreement with China Sonangol, its 29.9 per cent shareholder, for a $4m loan repayable in mid-December. The company “remains under pressure”, said Numis.
The trio are still seeking longer-term financing amid a gloomy outlook for iron ore. The price of benchmark 62 per cent iron ore has fallen more than 30 per cent this year, to $90.10 a tonne, and the African companies are far from China, the main market, and so face higher shipping costs than some competitors.
Furthermore there are significant differences in iron ore grades: African Minerals, for example, ships a product that trades at a hefty discount to the benchmark price.
The miner – currently cash flow negative – is hoping to improve product quality in coming weeks with a desliming process. Over the past two years the company set up by Frank Timis found the long west African rainy season difficult, with handling problems and shipping restrictions on cargoes with high moisture content.
While costs should fall and margins should improve as operations expand, both African Minerals and London Mining currently need an iron ore price above $100 a tonne to generate free cash flow, according to Macquarie. Andrew Mackenzie, chief executive of BHP Billiton, the world’s third-largest iron ore miner, said this week he did not see the price rising to more than $100 a tonne in the near term.
London Mining said on Thursday it was still confident of bringing in a substantial investment by a strategic partner by the end of the year. Thursday’s interim results, when its net loss widened from $5m a year ago to $12.6m, “reveal the thin ice they are walking on into year end”, said analysts at Barclays.
Meanwhile African Minerals has still not been able to finalise a planned $990m of investment from Tianjin Materials and Equipment Group, known as Tewoo, that was announced last September.
While the deal would give African Minerals “a well-insulated balance sheet”, the lack of updates on the financing was a concern, analysts at Citi said.
“African Minerals’ strategy was to get into production as quickly as possible and get enough cash to get into their higher margin, second-phase operation,” says a rival mining executive. “But now the iron ore price is down to a point where it is really hurting the junior miners.”
Source: FT
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