Press release

Financial investors to be key players in 2014 mining M&A

London, 3 February 2014

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A steady improvement in market conditions should see a gradual return to deal-making in the mining and metals sector in 2014, off the back of a seven-year low in global M&A volumes in 2013. 

Released today, EY’s report Mergers, acquisitions and capital raising in mining and metals: 2013 trends, 2014 outlook, shows the deal inertia evident in the sector last year. Excluding the all share merger of Xstrata and Glencore, deal volumes and value were down 25% and 16% year-on-year to 702 and US$87.3b respectively.

It is the lowest number of deals in the sector since 2006 and the lowest global deal value since 2009.

Capital raising followed a similar trend, with a 9% decrease in the total volume of issues to the lowest level seen since the 2008 global financial crisis, and a 9% increase in total proceeds to US$272b, largely due to some exceptional loan refinancings.

EY’s Global Mining & Metals Transactions Leader, Lee Downham, says the third quarter of 2013 is widely seen as the bottom of the market.

“The extreme price volatility and rapid changes to the global economy in 2012 and into 2013, combined with large impairments and senior management changes across the sector, meant the risks in doing deals in 2013 were just too great given the moving base on which decisions needed to be made,” says Downham.

“Although there were successful divestments, there is also strong evidence that price volatility continued to create a price expectation gap between buyers and sellers.”

Downham says the foundations have been laid for a gradual return to M&A in 2014.

“Confidence in the global economy continues to improve, larger companies have stronger balance sheets, and the focus on productivity and efficiency should begin to yield margin improvements. This should provide a better environment for both deal making and capital raising,” says Downham.

Financial investors will be key drivers of M&A

Financial investors and equity-backed alternative capital providers will be particularly active in the M&A market in the first half of 2014, driven by anticipated longer term commodity price recovery and the ability to leverage management ability.

“Private capital funds spent 2013 raising capital and we expect that to be deployed in 2014. We estimate these investors have more than US$10b deal capacity across the sector and we expect to see some big deals being done over the next year,” says Downham.

“They will be focused on low risk geographies and looking to leverage under-performing assets, using technical, operational and financial influence to generate better returns.”

This increased appetite follows a year in which financial investors’ share of total deal value in the sector increased from 5% in 2012 to 19% in 2013.

“This supports the view that 2013 marks the tipping point for the sector, with many of the providers of such capital calling the bottom of the market,” says Downham.

Capital raising outlook

EY expects to see a greater proportion of the sector’s funding to come from equity through follow-on raisings during 2014 and a stronger appetite from debt providers improving access to leveraged loans for quality mid-tier miners and developers.

“Risk capital for juniors is unlikely to be available on any large scale in 2014. While the best development projects will continue to attract funding from the increasing pool of private capital, it may take a longer period of sustained commodity prices and cost control discipline across the sector before we see strong investor confidence and IPO markets open for juniors,” he says.

“Many juniors have effectively suspended exploration and development activities to conserve cash for survival. Without new capital and new investment, the mining sector may well be sowing the seeds for the next boom as supply falls short of demand.”

Key numbers: global mining and metals 2013 M&A and capital raising

  • 703 deals globally with total deal value of US$124.7b.
  • Excluding the Xstrata/Glencore merger, 702 deals worth US$87.3b, down 25% and 16% respectively year-on-year.
  • Capital raising proceeds were up by 9% to US$272b, largely due to some exceptional loan refinancings, but remain well below 2011’s peak of US$340b.
  • Capital raising volumes were down 9% to 2.6b issues, the lowest since 2008.
  • Financial investors increased share of total M&A by value from 5% in 2012 to 19% in 2013.
  • Only 19 deals of US$1b+ in 2013, compared to 26 such deals in 2012. The 19 US$1b+ deals in 2013 represented 72% of total deal value but less than 3% of deal volume, highlighting the risk averse nature of deal-making during the year.
  • IPO volumes were down 70% to just 26, one of the lowest numbers in at least a decade, with only US$0.8b raised. Proceeds raised from follow-on issues increased marginally (1%) to US$26b but proceeds raised by junior explorers fell by 43% to US$5.9b.
  • Convertible bond proceeds were up 119% year-on-year to US$7.7b while corporate bond proceeds fell 22% to US$88b.
  • Loan proceeds increased 40% to US$149b.
  • Gold was the target of 34% of deals by volume, making it the most sought-after commodity in M&A in 2013.

Cross-border deal activity as a proportion of total deal volume fell for the first time since the financial crisis, dropping from 52% in 2012 to 42% in 2013, with only 18% of total deal value in 2013 targeting cross-border assets.

-Ends- 

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