Outlook for 2014: long-term health in the balance

M&A and capital raising in mining & metals

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The mining and metals sector is entering 2014 with a more positive outlook.

Confidence in the global economy is improving, companies have taken action to deleverage balance sheets and the industry-wide focus on productivity and efficiency should begin to yield results.

As a result, we expect the gradual strengthening of mining and metals equity valuations to continue and for increased availability of capital. However, continued economic volatility is also expected in 2014 due to:

  • Eurozone economics
  • Chinese economic rebalancing
  • US Federal Reserve policies regarding the tapering of quantitative easing

As supply and demand struggle to return to post-super cycle equilibrium, we expect further price volatility to occur for at least the next two years. This will see caution prevail, and any uplift in M&A activity and improvement of capital raising conditions will be gradual and will require innovation in pricing to tame volatility.

Conditions in the bond markets are likely to tighten if global interest rates begin to rise should quantitative easing begin to taper.

 

“We expect to see a greater proportion of the sector’s funding to come from equity through follow-on raisings, although a widespread return to equity will require a return of confidence at the top of the industry along with some high profile success stories among junior developers. If this occurs, it should translate into optimism and risk-taking at the bottom.”- Lee Downham, Mining and Metals Global Transactions Advisory Services Partner, UKI

 

Similarly, we are seeing strong appetite from debt providers, with increased competition among banks likely to improve access to leveraged loans for quality mid-tier mining companies and developers. However, given the strict criteria applied by these investors, it is questionable if the availability of these funds will support industry needs in its entirety.

We expect growth in M&A activity during the first half of the year to be driven by financial investors and equity-backed alternative capital providers. This growth will not only be driven by anticipated longer term commodity price recovery but also by the application of in-house technical experience to drive operational, technical and financial influence.

This has the potential to be the most exciting story of 2014. Will we see the deployment of capital so feverishly raised during 2013? And, if so, will it begin to drive new investment activity across producers?

With low levels of new capital and new investment, the mining sector may well be sowing the seeds for the next boom as supply falls short of demand. Will financial investors, private capital and other counter-cyclical investors be able to fill this capital shortfall in 2014?

We believe that a more patient form of capital creation is essential for the sector’s long-term health. This capital will be required to both replace the “hot money” that has been leaving the sector, as short- term returns fall from their record level, and provide capital for the next projects required to restore extinguishing supply or meet future demand growth.

The Capital Agenda

Based around four dimensions, it helps mining and metals companies consider their issues and challenges and understand their options to make more informed capital decisions.

  1. Preserving capital: reshaping the operational and capital base
  2. Optimizing capital: driving cash and working capital and managing the portfolio of assets
  3. Raising capital: assessing future capital requirements and assessing funding sources
  4. Investing capital: strengthening investment appraisal and transaction execution

How organizations manage their capital agenda today will define their competitive position tomorrow.