Mining companies took on considerable debt following the commodities boom that unfolded throughout the 2000s and early 2010s, driving EBITDA-to-debt ratios upward to unhealthy levels, according to research from Market Intelligence. But firms managed to recover by implementing strict spending limits and halting expansion initiatives. Between 2014 and 2016, capital expenditure growth dropped considerably, eventually bottoming out at -30 percent. Gold producers were especially drastic in implementing austerity measures. This development paid off for such firms, as most have been able to balance their budgets and now find themselves in position to pursue new projects.
The debt reduction race
The commodities collapse forced the top 50 mining companies by revenue to reduce their debts by one-quarter by selling off assets, implementing process optimization strategies and eliminating expansion plans, according to research from EY. Most firms ended such efforts in 2016, a year during which debt in the mining sector fell by 17 percent. Bondholders benefited greatly over that period, as these investments vastly outperformed stocks. In some cases, bondholders stood to earn returns of more than $500 per bond while their equity-minded counterparts risked taking losses of $128 per stock unit.
A changing marketplace
Last year, capital expenditures rose for the first time in three years, increasing an average of more than 11 percent across the mining industry, Market Intelligence found.
That said, it seems mining companies are taking a measured approach to development efforts since capital expenditures are likely to lag this year and the next. But these organizations would have never been able to decide their destinies without the budget cutting that unfolded following the commodities collapse.
Adapting to the shift
What is the next move for gold producers navigating the fluctuating middle ground between debt reduction and growth?
Acquiring investment capital is the prevailing goal among gold mining executives. But precious metals leaders are leaning on retailers when it comes to raising funds, as institutional investors have seemingly moved away from the space. One gold mining CEO told Kitco that retail investments constituted 80 percent of his financing. This state of affairs puts more pressure on gold producers to successfully market themselves to retailers in order to subsidize their operations, something a large percentage of mining companies are struggling to do.
Those that do succeed in obtaining extra funds and expanding their workflows have the opportunity to drive considerable profit due to increased investment in gold, Reuters reported. Demand is up more than 6 percent on year and is expected to remain strong throughout 2018.
Mining companies interested in promoting organizational growth while preventing the buildup of additional debt should consider connecting with USC Consulting Group. We can help precious metals producers streamline their processes, plan capital improvements and properly manage the funds allocated for such projects, thereby achieving optimal return on investment and keeping EBITDA-to-debt ratios low. With nearly 50 years of industry experience, USCCG is more than equipped to assist gold producers as they pursue more aggressive, growth-oriented business strategies. Contact us today to learn more about our services.