Window of opportunity for Chinese investors

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Beijing, 6 November 2013 - Chinese investors have a window of opportunity to take advantage of lower asset valuations and subdued M&A appetite in the global mining and metals sector to secure assets and meet the 13th Five Year Plan objectives, according to EY Global Mining & Metals Leader Mike Elliott.

Elliott says that while China has been the leading buyer of mining and metals assets globally for the first nine months of 2013 with 8% of all deals by value, investors will face increasing competition from global private capital investors.

“Larger global mining companies are focused on greater capital management and have more assets for sale that at any other time than in the past decade. At the same time, small and medium sized miners are being starved of capital and need to sell assets or find new partners who bring capital.”

“There is a window of opportunity for Chinese investors with an eye to the longer term to take advantage of the large number of assets available – this is unlikely to be repeated for some time.”

Global private capital competition

Elliott warns that unlike in 2009 when Chinese investors dominated mining and metals M&A in the wake of the financial crisis, there is now increasing private capital interest in the sector.

Financial investors’ share of total deal value has increased to 18% so far in 2013* compared to 5% in 2012.

“The push by private capital into the mining sector is gaining momentum. While it’s only just beginning to be evident in deal numbers, perhaps more telling are the regular announcements by funds that capital has been secured. We will increasingly see the deployment of this capital over the next couple of years.”

Price and currency volatility challenges

Elliott says increased price and currency volatility is also making deals more difficult.

“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,” he says.

Sharper and more frequent movements in commodity prices are expected to continue for the next 2-3 years.

“This means greater difficulty in matching buyer and seller price expectations and hence current deal completion rates are poor.”

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

“Investors should be seeking 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,” says Elliott.

More robust due diligence required

Elliott says greater scrutiny by Chinese regulators of past offshore deals has led to state owned enterprises being more risk averse in their deal making.

“While this has prevented some from undertaking deals at this time, others have been required to cover this increased risk sensitivity by means of more robust due diligence.”

Productivity upside

Elliott says in a time of lower commodity prices, focus on margin is all the more critical.

“Productivity performance of mining and metals assets globally – including in China – has been declining significantly over the last decade. Acquirers with a plan to reverse that productivity trend will deliver more value from the deal,” he says.

 

* Excluding the Glencore Xstrata mega deal.

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This news release has been issued by Ernst & Young, China, a part of the Ernst & Young global network.