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Lawyers predict mergers in struggling resources secto

Lawyers predict mergers in struggling resources secto

AS THE energy and resources sector flounders, project finance lawyers could be kept busy as smaller energy and resources companies are snapped up by bigger players.According to Allens Arthur…

AS THE energy and resources sector flounders, project finance lawyers could be kept busy as smaller energy and resources companies are snapped up by bigger players.

According to Allens Arthur Robinson partner Phillip Cornwell, smaller resources companies, which were thriving in the pre-credit crisis environment, have now become vulnerable takeover targets as finance availability dwindles.

Prior to the crunch, Cornwell said, smaller companies were benefitting from a combination of record commodity prices, a robust economy and a strong stock market, which made it relatively easy to raise capital to finance more marginal projects. However the triple whammy of the economic downturn, plunging commodity prices and the deepening credit crisis has made project financing more scarce, and smaller companies — with limited alternative financing options available — are the ones taking the hit.

“Bigger companies have a better ability to raise equity capital via rights issues and similar means, and they can borrow on the balance sheet — they can raise corporate finance rather than project finance. Smaller ones commonly have only one of a limited number of projects which were all affected by the commodity price drop, so they can generally only raise, in effect, project finance. So a [smaller] company which hasn’t quite raised funding for a project would be facing real difficulties at the moment,” Cornwell said.

Cornwell believes that these struggling smaller companies will become targets for larger, better placed companies — the acquisition of Queensland Gas by global giant British Gas being a case in point.

Deacons partner Nino Di Bartolomeo agreed that the market was now prime for merger activity. “I think that at the end of the day, for smaller companies that are in the development phase and not producing cash, it’s going to be very difficult to get project financing in this market,” he said.

“I think that with the depressed prices in the market, those entities who have got cash and can see a bargain will definitely look at acquisitions of good assets and we’ll see a fair amount of consolidation.”

While there’s no doubt that the project financing market has slumped, Cornwell and Di Bartolomeo agree that there are still opportunities for solid energy and resources projects.

“Any project financing in the resources sector generally relies on taking a long-term view of commodity prices, and banks have a more conservative set of assumptions for commodity prices,” Cornwell explained. “So the short term slump in commodity prices won’t completely deter banks from funding projects that look strong and that are in the lower quartile of the average cost of production.

“Certainly there’s quite a few banks — particularly the big four Australian banks — who are still lending and happy to look at resources projects.”

Di Bartolomeo concurred, adding that Chinese banks were now increasingly offering an alternative source for project financing in Australia.

“I think that while there’s a lot of doom and gloom around, and there has been a softening of opportunities in the market place … I think Chinese banks will actually provide a bit of impetus to the Australian market in providing another source of project finance in addition to the Australian banks,” he said.

“I think that’s a trend we’ll probably see developing over the next few years, particularly when it comes to financing inbound Chinese investment into Australia. I think that’s a very exciting area for the Australian legal market.”

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