“Despite short term volatility, the long term fundamentals in the mining and metals sector remain robust; BRIC countries are currently undergoing a wave of industrialization and urbanization which will continue to fuel demand for minerals and metals.” Michael Lynch-Bell
Global Mining & Metals Transactions Partner
Ernst & Young, UK
Robust demand fundamentals, strong balance sheets and an appetite for growth will drive a step-up in M&A in the global mining and metals sector in 2012.
The uncertainty and volatility is likely to continue through 2012, but mining and metals companies have an appetite for growth and are increasingly unwilling to stall their growth plans, so it’s likely there will be a return to deal-making in 2012. Those who can work with volatility will be the dealmakers in 2012 and there may well be real buying opportunities.
The focus of capital raising in 2011 was not aggressive re-leveraging but clever re-financing. Companies are coming into 2012 with credit rating strength and the capacity to gear up for future acquisitions.
Increase in alternate financing sources
Mining and metals companies will continue to tap the corporate bond market in 2012 and we also expect to see a further increase in the use of alternate financing sources such as sovereign wealth funds, private wealth and strategic partnerships using options such as off-take arrangements.
With the increased preparedness to do deals, it is unlikely that bigger deals will be entirely financed by bank debt in the short term. Companies may be returning to deal making but there will be a lag before banks return to megadeal M&A. This means that mining and metals companies are increasingly looking at multiple financing options and in making valuations are factoring in cash flows on a longer term basis and applying risk on a much more sophisticated basis.
Beyond the junior listings, a record number of IPOs were postponed in 2011 and there is a strong pipeline of companies that will “pounce” when there is a sustained period of confidence and stability in equity markets. If markets stabilize, this may happen in the second half of 2012.
Deals in emerging and frontier countries likely to increase
The fitter and faster companies will be best placed to maximize opportunities for growth during 2012. We expect the number of deals in those emerging and frontier countries that have high quality resources and friendly foreign investment rules to ramp up this year as risk appetites increase. This shift is primarily due to the diminishing availability of quality mineral deposits in developed mining countries at a reasonable price.