Mining and metals M&A: inbound investment remains strong

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Monday 5 November — Deal volume and value in the Australian mining and metals sector for January-September 2012 has dropped 17% and 50% respectively compared to the same period last year.

EY’s quarterly analysis of transactions, financing and capital raising in the mining and metals sector shows there were 167 deals with a total value of US$14.0 billion from January to September this year, down from 201 deals worth US$28.2 billion for the first nine months of 2011.

Globally, there were 684 mining and metals sector completed deals for total deal value of US$76.8 billion for January-September 2012, down 16% and 43% respectively.

However the headline numbers mask a year-on-year 48% increase in the value of inbound acquisitions of Australian mining companies and a 13% uptick in domestic deal value.

EY’s transactions mining and metals leader for Australia and Asia-Pacific, Paul Murphy, says Australia remains an attractive destination for mining investment.

“Despite mining cost inflation, high profile project deferrals and ongoing global economic uncertainty, Australian targets have continued to attract foreign investors looking to take strategic positions and secure commodities supply,” he says.

Murphy says inbound interest in Australia is likely to remain strong, with investors from China, Japan and Korea continuing to dominate.

“We don’t expect a significant spike in deal value or volume for the remainder of the year, but there are still a number of acquisition targets in Australia in the US$1 billion-plus cap segment across most commodities,” he says.

“M&A activity globally and in Australia in the short term is going to be opportunistic, with lower valuations and asset disposals presenting attractive buying opportunities for those with cash.”

“There is also a significant interest in the sector from specialist funds, private wealth and state owned enterprises looking to secure minerals supply or invest at what they perceive to be a lull in the cycle.”

“Juniors continue to find it very difficult to raise cash because of the poor equity market conditions. As a result, there are a number of funds targeting the sector, looking for minority stakes that can be a lifeline for the juniors while giving the investor access to offtake or an option over future stake building.”

“Juniors are also merging to generate greater scale benefits, reduce overhead costs and preserve cash.”

Capital raising & financing

The volume of capital raisings by Australian mining and metals companies for January-September 2012 was 597 issues (up 12% on the same period in 2011) and the total value was US$23.7 billion (up 27%), with the increase in value driven by corporate bond issues by the majors.

Globally, corporate bonds reached a record US$87 billion raised from January-September this year, already above the 2011 total of US$84 billion.

“The high yield and investment grade corporate bond markets are an increasingly attractive alternative to the bank loan market for producers in the sector,” says Murphy.

Overall however, global annual capital raising activity by the sector is set to decline for the first year since 2009, with a fall in all asset classes except bonds which continue their record run.

Total capital raised by the sector globally for January-September 2012 was down 37% to US$174 billion compared to the same period last year.

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Contact details:

Megan Ball
EY Australia
Tel: + 61 2 8295 6427