State-backed and financial investors to drive 2013 mining deals

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Monday 18 February 2013 - Mining and metals M&A in Australia is likely to pick up in 2013 off the back of demand from state-backed and financial investors, and ongoing divestments by larger miners seeking to recycle capital, according to EY.

The total value of mining and metals deals in Australia in 2012 was the lowest since 2009 at the height of the global financial crisis, while the number of deals was the lowest since 2006 – despite Australia being the most targeted destination for M&A in the sector globally during the year.

EY’s report, Mergers, acquisitions and capital raising in mining and metals: 2012 trends, 2013 outlook – released today – shows there were 941 completed deals globally in 2012 with a total deal value of US$104b. This was down 7% by volume and down 36% by value on 2011.

The annual report shows that for Australia there were 233 deals in 2012 (down 4% on 2011) with a total value of US$15.7b (down 59% or down 29% excluding BHP Billiton’s shale gas deals).

Paul Murphy, EY’s Australia and Asia-Pacific Mining & Metals Transactions Leader, says the interest in mining and metals from private equity funds, other specialist funds and sovereign wealth funds seen in 2012 will strengthen in 2013 and drive deal activity.

A new class of investor

“Our analysis shows that the share of deal value by ‘non-traditional’ acquirers has grown year-on-year to account for 31% of total deal value in 2012, compared with 21% in 2011. State-backed and financial investors account for 69% and 15% of this proportion respectively,” says Murphy.

“The financing game has changed. Traditional M&A and financing has become increasingly marginalised post-global financial crisis as access to capital via debt and equity markets became increasingly constrained.”

“We will see the continued rise of strategic and financial buyers in the sector throughout this year, motivated by the need to secure long-term sources of mineral supply and the prospect of quick returns respectively.”

EY analysis shows financial investors, (private capital, investment funds, sovereign wealth and real estate holding companies), are typically taking “toehold” investments of 10-15% while the increasingly commercially-focused state-backed strategic investors (state owned enterprises) are commonly adopting a larger investment strategy.

Capital raising

For the first year since 2009, there was an overall decline in the amount of capital raised by the sector globally – despite an all-time record US$113b raised from corporate bonds, 35% more than in 2011.

Total capital raised for the year by Australian mining and metals companies increased 39% on 2011 to US$35.9b, driven by a more than three-fold increase in corporate bonds from US$5.4b to US$17.2b.

Murphy says BHP Billiton’s AU$1b issue – the largest ever Australian dollar bond issue by any company outside the banking sector – may be followed by other larger miners in 2013 seeking to mitigate the risk through diversifying US dollar dominated funding.

During 2012, economic uncertainty created volatility and risk aversion among investors, limiting capital raising options for mid-tier and junior mining and metals companies, but generating unique opportunities for the sector’s relative safe havens – the investment grade producers.

Loan proceeds for Australian mining and metals companies increased 10% year-on-year to US$12.0b, while globally loan proceeds fell to US$106b as banks continued to reduce their exposure to riskier assets to manage their reserve capital requirements. Of the loans that were closed globally in 2012, more than half were an extension of existing facilities, resulting in relatively little new bank debt for the sector.

Convertible bond issues for Australian companies increased from 23 to 39 by volume, raising US$867m, up from US$130m in 2011. The volume of convertible bond issues globally increased from 73 in 2011 to 113 in 2012, but with relatively low proceeds, up from US$2.4b in 2011 to US$3.5b.

IPOs and follow on issues

The total value of mining and metals sector IPOs globally in 2012 was the lowest since at least 2007, with a year-on-year 40% fall in volume and 81% fall in proceeds, even excluding the Glencore float in 2011.

In Australia, the number of IPOs in the sector more than halved to 28 while total proceeds plunged 72% to US$140m.

“IPO markets were practically closed on anything other than highly-dilutive terms,” says Murphy.

Similarly, widespread risk aversion culminated in a 48% reduction in secondary equity proceeds globally to US$26b, and a reduction in average proceeds by junior companies to just US$4m, down from US$6m in 2011.

In Australia, average proceeds from follow-on issues in 2012 halved to US$7.5m, down from US$14.4m in 2011.

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Contact details:

Megan Ball
EY Australia
Tel: + 61 2 8295 6427