Strong growth in commodity prices, combined with solid production levels, has created a new and welcome problem for an increasing number of mid-cap mining companies in Western Australia: how to spend their rapidly expanding cash reserves.
Base metals miner Perilya and nickel miner Minara Resources typify companies that just a couple of years ago faced major financial and production challenges, but are now awash in cash.
The latest batch of quarterly reports has highlighted the big improvement in their financial position.
With minimal debt and zinc prices at high levels, Perilya generated $42 million of free cash flow in the September quarter and increased its cash-on-hand to $169 million.
It was a similar story at Minara, which ended the quarter with cash-on-hand of $177 million, even after making a $58 million dividend payment.
The challenge currently facing the likes of Minara, Perilya, Jubilee Mines and Mincor Resources is how best to take advantage of this rare opportunity.
All of these companies are pursuing a range of expansion projects, as they seek to lift production and in some cases add diversity to their operations.
Perilya general manager, sustainable development Peter Eggleston said the company was developing the Potosi mine at Broken Hill, was evaluating the re-opening of the nearby North Mine and was considering a new zinc project in South Australia.
Another option for cashed-up miners is to pursue exploration opportunities, though most mining companies remain wary of spending big on greenfields exploration.
Mincor Resources is one company to have stepped up its exploration program, lifting its exploration budget from $8 million to $12 million.
Argonaut managing director Eddie Rigg said the current conditions were ripe for mergers between companies with plenty of cash and companies with development projects.
As well as bringing their financial resources to the table, he said established miners would also bring their project development and mine management experience, which could be highly beneficial at a time of skills shortages.
“The difficult part is dealing with some of the people issues,” Mr Rigg said.
He added that merged companies would get onto the radar screens of bigger institutional investors and potentially lead to a re-rating of the stock.
Most of the cashed-up companies have already lifted their dividend payments, and may need to consider options like a capital return or share buy-back if they are unable to find other ways of investing their cash reserves.
