April 2014

Capital Confidence Barometer

Mining and metals

Key findings

46% perceive credit availability to be improving

63% with excess cash plan to return capital to shareholders

47% believe there to be greater short-term market stability

35% consider productivity and cost reduction their primary focus

60% believe global deal volumes will improve for the sector

EY - Capital Confidence Barometer
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While productivity and cost reduction continue to be the key focus areas for the mining and metals sector, we are gradually seeing confidence return.

Management is beginning to consider how best to improve shareholders returns, with many considering higher dividends and share buyback programs in the absence of investment opportunities that are acceptable to the market.

"Boards are focused on optimizing cost base and capital structures and the impact of this is far reaching across portfolios.” – Lee Downham, Global Mining & Metals Transactions Leader

Mining and metals executives’ desire for growth has slowed in the past six months. Companies are optimizing cost structures to drive greater margin improvements, reflecting a new paradigm where the drive to produce, regardless of cost, is no longer the right option. 

Key findings

Economic confidence stabilizes after a two-year high

EY – Mining and metals April 2014 global economy perspective

Stable underlying economic fundamentals are supporting a more settled global economic outlook. Respondents are optimistic about future company valuations and believe there to be more short-term market stability right now. This follows a period of extreme price volatility and rapid changes to the global economy that defined 2012 and persisted through 2013.

With these two factors aligned, we expect to see investor confidence begin to return and consequently capital raising and allocation pressures ease. However, this is likely to be a gradual recovery, and companies are reshaping their strategies and right-sizing in order to maximize returns in the near term. 

Improved in credit availability will drive momentum

EY – Mining and metals April 2014 credit availability

The majority of respondents believe credit availability to be stable or improving. Improving economic signals in developed nations have bolstered equities and general market sentiment, although concerns around emerging markets and the developed markets debt-led growth persist.

Total proceeds raised by the sector were relatively subdued in Q1 2014, at US$55b – a year-on-year fall of 32%. However, improving liquidity in loan markets and the continuation of supportive corporate bond market conditions for issuers is underpinning ongoing optimism among respondents in respect of their ability to raise capital. 

There is increasing pressure for mining and metals companies to strengthen balance sheets, and de-leverage and improve debt serviceability.

Excess cash earmarked for shareholders

EY – Mining and metals April 2014 excess cash

Mining and metals companies have changed their focus from a strong growth agenda six months ago to a focus on achieving operational efficiencies and maintaining stability. Market sentiment has changed; the focus is no longer on near-term growth but instead optimizing existing assets across the portfolio.

Over the next 12 months, 63% of those with excess cash, after investments, expect to return it to shareholders in the form of dividends or share buy backs. The issue of cash dividend payments has moved up the boardroom agenda as a result of shareholder pressure, according to 31% of respondents.

Deal volume expected to improve, despite drop in Q1

EY – Mining and metals April 2014 expectation to pursue acquisitions

Two-thirds of mining and metals respondents expect deal volumes globally to improve over the next 12 months but remain cautious about pursuing an acquisition.

During the first three months to March 2014, there were only 135 deals closed, totaling US$6.7b, down 31% and 67%, respectively, over the same period in 2013. Of this, 38% of acquisitions were undertaken by companies outside of the sector, compared with 28% during Q4 2013.

M&A activity across the sector is expected to increase as access to capital and investor confidence improves. However, this is likely to be gradual, providing unique opportunities for those buyers with access to patient capital.

We expect deal flow to be driven by:

  • Portfolio optimization
  • Financial buyers with access to capital and an eagerness to participate in the sector’s expected growth
  • Consolidation among the junior and mid-tier mining companies to pool resources and gain scale

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What is your perspective on the state of the global economy today?

EY – Mining and metals April 2014 global economy perspective
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What is your level of confidence in credit availability at the global level?

 

EY – Mining and metals April 2014 credit availability
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If your company has excess cash to deploy, after organic and inorganic investments, how do you plan to return cash to stakeholders?

 

EY – Mining and metals April 2014 excess cash
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Do you expect your company to pursue acquisitions in the next 12 months?

EY – Mining and metals April 2014 expectation to pursue acquisitions
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