The mining industry is facing challenging times. A combination of a freefall in commodity prices, a sharp turn in Chinese economic strategy and a consequential dearth of capital for the industry means that it is not possible to call time on this difficult period. This absence of capital has led to some naval gazing among pundits as to which location offers the best prospects to the industry for sourcing money. The subject was recently debated by a panel at the Mines & Money conference in London (a panel which the author moderated).
It has been suggested that the attractiveness of a hub can be simply assessed through whether professionals wish to live there. London would seem to tick many boxes here. London’s location in a central time zone also assists with communications. Aside from these considerations though a hub for mining finance needs to offer substantial capacity for equity, debt and trading. London is able to offer all three. The London Stock Exchange is one of the principal exchanges for the listing of large mining companies. AIM, while bereft of activity for the last several years, has been a historical source of capital for the junior/ mid-cap sector. For debt most of the financial institutions active in the mining industry have teams resident in London. In trading the LME and several precious metal trading associations offer important capacity.
Several centres can lay a claim to surpass the level of activity in London in connection with any one of these constituent parts but few can claim dominance, or even a prominent position, in all three. For many years Toronto has probably been the leading source of equity capital through the TSX and related exchanges (although on one analysis more has been raised on the ASX). None of Toronto, Perth or Sydney though offer the depth in debt finance, at least for projects globally, as can be found in London. While trading is a global business the presence of the LME, LBMA, etc in London means the presence of a large number of trading professionals. When the number of other professionals active in the mining industry - such as lawyers, accountants, etc - is factored into the equation then the critical mass story in London becomes compelling.
There is a long history of raising equity capital for the mining industry in London – Antofagasta for example is one of the oldest companies listed on the LSE. While the valuation of global mining companies listed on the LSE has been in decline for the past couple of years there has been an uptick in the actual number of listings. On the other hand LSE is perceived to be expensive when compared with the costs of listing elsewhere. A further factor favouring London has been the growth of the number of private equity funds specialising in the mining sector. While there has been much discussion about the actual investments made by such funds there is no doubt that a significant number of those funds are based in London, and that the funds have money to invest. The AIM market seems destined to continue in the doldrums for the moment - although the number of de-listings in the mining sector which have occurred during 2015 are apparently no worse than historical averages.
London’s undisputed status as a major commercial banking hub ensures that the mining community is well-served for corporate debt and project finance. Chinese banks are also beginning to realise the need for a presence in London to do business with the mining industry. The bond market thrives although arguably the greatest source for bond funding remains the US. The availability of debt finance seems to remain liquid. It is the equity piece of the capital puzzle which provides the greater challenge. The large investment banking community ensures a critical mass for M&A and other advisory activity. What is less clear is the amount of activity in the growing alternative sources of debt funding such as streaming and royalty finance. While there are several groups based in London which provide this option many seem to be based in traditional mining centres such as Perth, Toronto and Denver.
In connection with trading the level of activity in London continues to be impressive. More than 80% of global non-ferrous metal trading is conducted on the LME markets. There are challenges though. Low commodity prices mean that the exchanges have to market significantly to keep up volume (although having said that there seems to be some evidence that the macro funds are taking significant positions). More sophisticated technology and platforms offer significant challenges. On the other hand scandals such as those related to the Chinese warehouses serve as a reminder that London based systems do afford greater certainty and transparency. The various exchanges have also anticipated global competition by forging alliances with exchanges elsewhere to ensure enhanced global coverage and competitiveness. The increasing degree of regulatory control and requirements, including MiFID II, have been cited by some as a challenge to the competitiveness of the trading community in London. Paradoxically, however, the same may have the reverse effect as it supports confidence in systems and in any event the steep regulatory curve of the last 3-5 years seems to be flattening out.
In summary, while the competition is stiff London would appear to be more than holding its own as a principal global centre for mining finance. Location and quality of life issues have provided a helpful background landscape - a landscape which has helped foster significant critical mass. The dynamic looks well set for the future - although complacency will have to beavoided.
This article was first published in Mining Journal, 9 December 2015