Global mining & metals transactions: 2012 trends 2013 outlook

Outlook: new wave of capital raising options

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Long-term demand for the sector will continue to be driven by China and other BRIC (Brazil, Russia, India and China) and developing nations.

“Equity markets are likely to remain challenging in early 2013 and traditional project debt will continue to be available for only the lowest risk, highest quality projects.”

– Lee Downham
Global Mining & Metals Transactions Leader

The rapid cut-back of expansion and capital spending by many organizations is expected to slow long-term supply and prolong a “super-cycle” scarcity premium. Consequently, those with access to capital and a long-term view will seek to invest.

The “capital strike’ is expected to continue until commodity prices recover sufficiently to encourage new investment. For example, we believe that the iron ore price would need to exceed $130/tonne for a prolonged period of time to unlock the next wave of expansion projects.

Hence, M&A of iron ore juniors below that level represent an option over future supply shortfalls.

This capital strike will also impact the majors as a consequence of their 2012 asset reviews. A number of high-cost mines are high cost because they have been starved of capital in recent years.

We expect a good number of these mines to be divested by the majors to owners with capital available for acquisition and reinvestment.

Shift to non-traditional capital providers

The 2013 capital raising environment is expected to be shaped by the continued shift from traditional capital markets funding to non-traditional capital providers.

The announcement in January 2013 of a delay to full implementation of, and changes to, Basel III liquidity requirements is unlikely to herald a significant change in lending behaviour in the year ahead.

As a result, we believe there will be a continued scarcity of longer-term commercial bank lending, with private, strategic lenders, equipment providers and national and development banks taking the role of project financiers.

A slow and steady revival in equity markets is anticipated as confidence returns and a strong pipeline of cross border IPOs eagerly await the return of the market.

Corporate bonds will remain a popular source of finance during the year ahead. We see the potential for an increased flow of funds into the high yield sector, supporting the industry’s mid-tier growth as the investment grade market becomes saturated and investors chase greater yields.

Shareholders demands for greater dividends may threaten growth during 2013, where investors have been increasingly frustrated by weakening share prices and lower profitability.

Shareholders are calling for companies to re-think capital allocation decisions and this will inevitably result in a greater focus on capital recycling.

As a result, leaner business models and stronger balance sheets will emerge during the second half of 2013 as companies continue to rationalize portfolios, unlock capital through divestments and drive cost savings.

Re-focus on growth

We anticipate that companies will look to re-focus on growth in late 2013 as the pressure to replace depleting reserves and maintain production mounts. The question remains as to whether this will take the form of building or buying.

While it is likely to be both, we expect to see a stronger buy-cycle during 2013, underpinned by lower valuations and in response to large cost overruns at several greenfield projects. Buying opportunities will be pursued by those companies that emerge financially stronger and are able to access capital to drive M&A.


Please note - The data in this report is primarily sourced from ThomsonONE.com, and unless otherwise stated, all values are in US dollars.

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