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M&A and capital raising in the mining and metals sector, 1H 2011 - Capital raising trends and outlook - EY - Global

M&A and capital raising in the mining and metals sector, 1H 2011

Capital raising trends and outlook

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2011 has seen some high profile postponements, but the pipeline remains strong, suggesting companies are holding out for a better pricing environment.

Summary: The mining and metals sector is heading for another record year of financing as the industry’s growth story continues. Access to capital is no longer a major concern for mid-tier and major companies and proceeds are up in all asset classes except convertibles.

Mining and metals IPOs grow, but volatility constrains

There has been an increase in the volume of IPOs in 1H2011 primarily from a strong flow of junior listings in Australia and Toronto, and also a number of Chinese listings (including Hong Kong) which were largely domestic issues by steel and aluminium companies.

The US$10b IPO of Glencore in London is the stand-out for 2011 so far and a test of the market. Excluding Glencore, proceeds are down significantly year-on-year, reflecting the extent that volatility is deterring activity.

2011 has seen some high profile postponements, but the pipeline remains strong, suggesting companies are holding out for a better pricing environment and for capacity to return following the Glencore IPO.

Capital raising proceeds, 2007–1H2011

Capital raising proceeds, 2007–1H2011

Source: EY Analysis

Strong secondary equity issuance in 1H 2011

The materials sector was the most active globally by volume of issues, and raised the second highest proceeds after the financial services sector.

Proceeds increased year on year, with some large fundraisings by mid-tier miners and metals producers for capital investment and acquisitions. Junior companies accounted for around a third of the proceeds raised and 94% of volume of issues, raising, on average, proceeds of US$6 million for working capital and project development.

Steel, gold, iron ore and coal attracted the most investment but rare earths also emerged.

There is also a strong pipeline of spin-off IPOs to unlock value in standalone projects or product groups going into 2H 2011.

Buoyant bond market supports mining and metals high yield issues

Corporate bonds remained in demand in 1H2011 as market conditions continue to be buoyant, keeping down the cost of issue at 2010’s record low levels. There was a rush to market in May, ahead of an expected rise in benchmark rates, but persistent market volatility and economic uncertainty in June eroded risk appetite.

The coupon on high yield issues fell to a new low of 6.64% in May (across all sectors) and Vedanta resources took advantage, issuing one of India’s largest ever bonds by a non-financial issuer at a coupon of 6.75%.

The proportion of high yield issuance increased, reflecting appetite for higher risk/higher return investments. Three of the top 10 issues were high yield, while the mining and metals sector was the second largest issuer of high yield notes (ex. financial services).

A greater proportion of proceeds were used for purposes other than financing in 1H2011, but refinancing is still a primary driver.

Loans: bank support for mining and metals M&A

Loan proceeds and volumes are ahead of the same period a year ago, reflecting growth in M&A activity — some of the industry’s biggest acquirers have borrowed to part-finance their acquisitions.

There is a greater availability of bank debt, but it is an issue of affordability. Interest rates, while moving in the right direction, remain high compared with the previous debt cycle.

Loans to junior companies were few and far between — the risks generally too great for commercial banks. Juniors instead relying on equity investors and multilaterals/development banks for project finance.

A large proportion of loans were for refinancing, a trend reflected across all sectors — only 35% of global issuance represented new loan assets in Q12011.

The year’s largest loan so far was by Glencore — borrowing US$12 billion prior to the IPO, for refinancing purposes. Asian and Western European producers in the steel sector dominated the loans market, borrowing for acquisitions, project finance, capital expenditure, working capital and refinancing.

Capital raising outlook in mining and metals

We expect significant IPO activity in the second half of 2011, carrying through to 2012.

There are signs of willingness by banks to lend for acquisitions again — this willingness will be tested if transformational deals do make a return.

However, volatility is likely to be a key theme throughout the remainder of 2011, influencing investor sentiment and appetite for risk. Timing will be critical as this volatility is likely to impact valuations and increase the cost of borrowing.

Junior companies, reliant largely on equity markets to deliver growth, will be highly vulnerable to investor sentiment and volatile reaction to global events (e.g., uranium).

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