Corporate Finance Insights – February 2013

There’s been considerable debate recently around whether the natural resources boom has ended. In this edition of Corporate Finance Insights we step back from the day-today volatility in coal, iron ore and energy prices and try to understand some of the key drivers of the recent boom.

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Welcome to our special Natural Resources edition of Corporate Finance Insights.

In recent months there has been considerable debate in the Australian media around whether or not the natural resources boom has ended. Certainly market prices for most commodities have come off their 2011 highs, but where do we go from here?

In this edition of Corporate Finance Insights we step back from the day-today volatility in coal, iron ore and energy prices and try to understand some of the key drivers of the recent boom. Our general conclusion is that, while the ‘froth’ has come out of the sector over the last year, the fundamental shift in commodity demand and supply conditions experienced over the last decade remains in place. While commodity prices will always be volatile, the future of the resources sector remains very positive on the back of significantly increased global demand for resources.

In our opening article, Brad Calleja examines the fundamental shift that has occurred in the global economy over the last decade. Since 2002, the rapid growth experienced by many developing countries has seen the major advanced economies’ global share of GDP fall from two-thirds to less than half. This rapid growth in manufacturing intensive economies has meant the global economy has more than doubled since 2002.

It is this global shift in demand that has prompted the so-called ‘millennium boom’ in commodities volumes and prices – and it is unlikely to end anytime soon.

In order to provide some insight into this demand for resources, our second article is an interview with Harsh Mishra, Chief Executive Officer of the Australian operations of Adani, India’s largest importer of thermal coal. Mr Mishra provides a compelling insight into the significant growth in the demand for energy in India and the anticipated need to double the installed electricity generation capacity over the next six years. By acquiring the largest thermal coal tenement in the world, in the Galilee Basin in Queensland, Adani is looking to help secure India’s energy needs for decades to come.

Coal is probably the commodity that attracts the most media because of the significant decline in prices over the last year and some concerns around long-term demand for thermal coal as governments increasingly take action on climate change. In our third article, James MacGinley examines the Australian coal industry and, while recognising some current challenges, finds that the long-term future is not as gloomy as often portrayed.

A key feature of the resources boom to date has been a very large increase in foreign investment in Australian projects. Michael Prentice and I look into the source of this foreign investment and explore the challenges related to unlocking this. Our conclusion is that there is still a very large pool of capital available – but it needs to be for the right projects. While Australia remains an appealing jurisdiction mainly due to the high quality of its mineral resources and relative political and legal stability it has become an increasingly expensive place to do business. Onerous environmental and project development requirements, declining productivity and a rising Australian dollar leading significant cost overruns on many major projects are common concerns.

The multi-billion capital cost of more recent LNG and bulk commodity resource ‘mega-projects’ over the last two years has strained traditional project finance debt markets liquidity. As a result we have increasingly seen Export Credit Agencies (ECA’s), particularly from Asia play a critical role in filling liquidity gaps to fund these projects. Julia Hinwood explains the role of ECA’s and how they are used by project sponsors to bring large and complex projects to life.

While significant debt financing has been available to large, investment-grade mining companies and projects, financing smaller, sub-investment-grade projects can be challenging. In our final article, Omer Molad considers some of the debt capital market options available to sub-investment grade mining companies. While this market sector is typically heavily reliant on bank project financing, there are opportunities to supplement this financing using US 144 A, private placement and convertible bond markets.

NAB has a passionate interest in supporting the resources sector over the long-term. We hope you enjoy this edition of Corporate Finance Insights.

For further analysis download the full report.