Renewed Chinese investment in mining M&A

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Monday 18 November 2013 — Renewed Chinese investment and increasing private capital interest may be key to mining and metals sector deal activity in Australia in the near term, according to EY Asia-Pacific Mining & Metals Transactions Leader Paul Murphy.

EY deal data for January-September 2013 confirms the slide in mining and metals M&A activity in Australia compared to prior years, with 136 deals worth US$3.4billion this year, down 21% and 76% respectively on the same period in 2012.

Globally it is a similar tale, with 537 deals worth US$96.9b for January-September 2013. Excluding the Glencore Xstrata mega deal, total global deal value was US$59.5b, a 22% decline on the same period in 2012 and a 24% decline on deal volume.

However, Murphy says that despite overall low numbers, signs of renewed Chinese activity are a positive sign.

“Chinese buyers accounted for 60% of inbound investment for the first three quarters of this year and more than a third of total deal activity in Australia by value, compared to 8% of deals by value globally” he says.

Globally, private capital interest in the sector also continues to grow, with financial investors taking an increased share of total global deal value – 18% when excluding Glencore Xstrata, compared with 5% in 2012.

Murphy says Australian targets are not excluded from this with pre-production assets increasingly attractive to the growing number of resources equity funds and private capital.

“Small and medium sized miners are being starved of capital and have stretched out their precious cash to survive to date but at some point something has to give, so they will need to sell assets or find new partners who bring capital,” he says.

Price and currency volatility stymies deals

Murphy warns that ongoing price and currency volatility will continue to make deal completion difficult.

“Globally and in Australia there is a deal inertia and a seemingly unbridgeable valuation gap continuing to stymie deals,” he says.

Demand for most commodities has outstripped supply for the best part of the past decade, fuelling higher prices and encouraging new supply. As supply and demand now approach equilibrium, longer lead times in changing supply are leading to over and under corrections in supply, causing increased price volatility.

EY expects sharper and more frequent movements in commodity prices to continue for the next 2-3 years.

“This means greater difficulty matching buyer and seller price expectations and as a result current deal completion rates are poor,” says Murphy.

Buyers who are able to build greater flexibility into deals – including contingent pricing – will be more successful in completing deals.

“Investors should seek to understand where value is being created through the introduction of greater production flexibility in the assets they are assessing for acquisition because it may uncover hidden value.”

January-September 2013 summary: Australian mining and metals transactions and capital raising

  • 136 deals worth US$3.4billion, a year-on-year decline of 21% and 76% respectively
  • Outbound M&A accounted for 31 deals with total value of US$199m
  • Inbound M&A accounted for 35 deals with total value of US$2b
  • Domestic M&A accounted for 136 deals with total value of US$1.2b
  • South Africa was the top destination for outbound deals by value
  • Coal was the top target commodity of Australian outbound deals by value
  • Total capital raising by Australian mining and metals companies for January-September totaled US$10b from 511 issues, a year-on-year 60% and 13% decline respectively

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Contact details:

Megan Ball
EY Media Relations
+61 2 8295 6427