Deal inertia in mining but private capital push gathers momentum
London, 4 November 2013
Inertia and a seemingly unbridgeable valuation gap continue to stymie deals in the global mining and metals sector, according to EY Global Mining & Metals Transactions Leader Lee Downham.
Deal data in EY’s 3Q/9M 2013 Mergers, acquisitions and capital raising in mining and metals analysis shows a significant drop in Q3 transaction value and volume contributed to a 22% year-on-year fall in deal value for the first nine months of 2013. This excludes the US$37.4b Glencore Xstrata merger which overshadows the underlying trend.
A total of 165 deals completed in Q3, with a total value of US$8.0b. For the nine months January-September 2013, there were 537 deals worth US$96.9b. Excluding the Glencore Xstrata mega deal, total deal value was $59.5b, a 22% decline on the same period in 2012 and a 24% decline on deal volume.
“Sellers do not need to sell urgently and buyers remain cautious, creating significant deal inertia,” says Downham.
However, private capital interest in the sector continues to grow, with financial investors taking an increased share of total deal value – 18% when excluding Glencore Xstrata, compared with 5% in 2012.
“The push by private capital into the mining sector is gathering momentum. While it’s only just beginning to be evident in deal numbers, perhaps more telling are the regular announcements by funds that capital has been secured. We will increasingly see the deployment of this capital over the next couple of years,” he says.
Low risk and domestic deals dominate
“Much of the mining and metals sector remains cautious and introspective, and this is reflected in the low risk and predominantly domestic nature of deals being done.”
“Companies are transacting for synergies and margin to improve the bottom line, rather than growth of the business. It is a very risk averse transacting environment.”
Capital raising falls
Unsurprisingly, overall capital raised by the sector in Q3 was subdued, falling to US$39b from US$78b in Q2. Overall proceeds raised between January and September 2013 increased by 10% year-on-year to US$206b, largely due to some significant debt refinancing by the majors in the first half of the year. However, the volume of issues declined to 1,772, a year-on-year drop of 11% compared with the same period in 2012.
“Equity markets remain challenging, with junior follow-on proceeds and IPO volumes remaining at historic lows. This continues to create opportunities for alternative finance and private capital providers,” says Downham.
Junior miners remain focused on survival
Junior miners remain focused on cash conservation, with some experiencing financial distress.
“There seems to be an increasing number of capital providers available to the sector, and the different forms of capital have evolved, but capital is still only being attracted to the very best projects,” he says.
Downham says juniors are looking to hold on until the market improves, relying on highly dilutive convertible bonds or high interest loans. Both the total value and volume of follow-on issues by explorers increased slightly in Q3, but average proceeds fell further, to just US$2m.
While equities markets more generally are gathering momentum, the window for mining and metals sector IPOs remains closed.
With the exception of emerging market state privatizations, Downham says there is little IPO pipeline in the sector.
“It may take a longer period of sustained commodity prices and cost control discipline across the sector before we see wider investor confidence and IPO markets open properly,” he says.
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