The equity markets are becoming increasingly sensitive to macroeconomic news, and for many companies, market values do not appear to be correlating with the value under the ground.
Although sizeable deals completed during 2011, macroeconomic issues and resource nationalism made investment decisions more difficult, contributing to lower volumes of M&A during 2011 compared with 2010.
During the second half of 2011, the US credit rating downgrade, Eurozone debt crisis and lessening Chinese growth rates caused dramatic stock market volatility and tested the confidence of many mining and metals companies to undertake M&A.
In our view, this will not last given that the sector fundamentals are strong and growth from China and other BRIC (Brazil, Russia, India and China) nations will fuel demand for metals and minerals. Mining and metals companies are increasingly looking to transact in ways that can accommodate continued volatility.
The equity markets are becoming increasingly sensitive to macroeconomic news, and for many companies, market values do not appear to be correlating with the value under the ground. Increases in commodity prices are often not fully impacting share prices, whereas decreases are.
This is creating differing asset valuation expectations, impacting the ability to complete M&A. This trend will increase the importance of conducting thorough diligence, in order for management on both sides of the deal to be at ease.
Unsurprisingly, overall IPO volume was down 18% to 145 listings in 2011, with global equity markets weighed down by volatility and uncertainty. However, there was still a healthy number of small-scale junior IPOs in Australia and Canada.
The challenging market conditions made the biggest impact at the larger end of the market, with a record number of IPOs postponed and remaining firmly in the pipeline.
The spread of resource nationalism across developed, emerging and frontier countries was a key concern among mining and metals executives, causing uncertainty and delay to M&A investment decisions. Resource nationalism is often viewed as a part of doing business in the sector and the risk is factored into deal valuations, but the increasing prevalence of resource nationalism, and the uncertainty that it generates, is making it harder to value assets over the life of mine.
However, for those governments who continue to debate legislation and manage these changes less efficiently, the uncertainty could potentially deter investment for anything other than the largest, most scalable and low cost assets.
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