Infrastructure key driver in 2012 Australian mining M&A
Monday 6 February — Infrastructure development and non-core divestments will be key drivers of mining and metals sector M&A in Australia in 2012, according to Ernst & Young’s Australia and Asia-Pacific Transactions Leader Paul Murphy.
Commenting on the release of Ernst & Young’s annual global mining and metals sector transaction report, Recognizing value in volatility, Murphy says that outside the larger coal deals already announced, 2012 is likely to be dominated by smaller size deals, joint ventures to access funding for infrastructure development and divestments of non-core or higher risk assets.
“We will continue to see brisk activity in infrastructure development this year as companies race to bring production online and product to market,” he says.
“There are probably fewer than 10 potential US$1 billion-plus deals that could happen in the Australian market this year, as opportunities for better quality mid-tier assets have largely been picked off over the past couple of years.”
Ernst & Young’s report shows that in Australia in 2011 the number of deals dropped 17% on 2010 to 242, while total deal value jumped 64% to US$38.6 billion. However, BHP Billiton’s two shale gas / oil acquisitions in the US accounted for 43% of total value. When those two deals are removed, total deal value for the year is a far more modest US$22.1 billion.
“While uncertainty and volatility is likely to continue to play out on the world stage, the appetite by management and investors for growth is again likely to provide sufficient stimulus for strong M&A activity in Australia in 2012,” says Murphy.
“Overall, commodity prices in 2011 were up on 2010, driving an improvement in earnings and cash positions. Many companies are faced with the challenging but favourable decision of how best to utilise their capital – the dilemma of buy, build or return is back on many boardroom tables.”
Inbound investment in Australia in 2011 came primarily from the US, China and Canada with coal deals dominating. The total value of inbound coal deals dwarfed that of any other commodity – US$11.3 billion compared to US$8.2 billion for all others combined.
Chinese investment in Australia in 2011 came largely through strategic minority equity stakes in junior ASX-listed companies with assets in frontier market hot spots in parts of Africa and Asia.
“This is part of a global trend that will likely continue this year,” says Murphy.
In addition, if the ban on Australian uranium exports to India is lifted as expected, this may trigger acquisition activity by Indian investors in early stage uranium players that have found it difficult to raise equity funding or debt financing from banks.
Mining services – targets in 2012?
Murphy says 2012 may also see mining services companies become acquisition targets of miners.
“Capacity constraints remain a major challenge for mining and metals companies and miners are looking at their supply chains to see where the risks are, so we could see miners considering acquisitions to de-risk supply,” he says.
IPOs
Despite the volatility in equity markets, there was still investor support for a healthy number of small-scale junior IPOs in 2011, with the ASX hosting the highest share of mining and metals IPOs globally by volume (44%), but with average proceeds just US$7.7 million across 64 IPOs.
“Although there is a strong pipeline of potential IPOs, equity markets are expected to remain volatile so we do not see any major increase in IPO activity this year. However, the smaller US$5-US$10 million IPO market here remains fairly robust and will remain an important source of capital for small resource companies.”
“The availability of seed capital in markets such as the ASX and TSX, and the depth of experienced mining teams to develop mine projects, has been conducive to growth in seeding exploration companies to develop earlier stage projects in higher-risk frontier geographies. These companies in turn lay the foundations for future investment by the mid tiers, a stand out trend of 2011.”
In 2012 we also expect Australia to be a prominent market for IPOs – with a strong pipeline of inbound and domestic listings. Market conditions will dictate the timing and size of offerings.
Financing
Globally, the major diversified miners and mid-tier companies embraced the corporate bond market in 2011, with a record US$84 billion issued, up 16% on 2010. Australian companies accounted for 6% of the capital raised.
The number of convertible bonds issued by Australian companies was also well up on 2010, though proceeds were down with just US$130 million raised from 23 bond issues (compared to US$508 million raised from 13 issues in 2010).
“Convertibles provided a means for advanced juniors, unable to access the corporate bond markets, to raise funds for working capital, exploration and development,” says Murphy. “With little change expected in the availability of bank debt, convertible and high yield bonds may well continue to be an important source of capital for this segment of the market.”
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