New analysis shows acquisitions deliver for mining shareholders
London, 4 December 2013
M&A delivered better returns than organic investment for mining and metals companies during the past decade, new analysis by EY shows.
EY data presented at the Mines and Money London conference today shows the companies with the highest relative spend on M&A as a percentage of market value delivered the highest total shareholder returns (+414%) over the period 2002-2012, compared to both those companies with the highest relative spends on organic investment (+181%) or dividend/paybacks (+340%).
EY Global Mining & Metals Transactions Leader Lee Downham says M&A also trumped organic investment in analysis from the period post financial crisis (2009-2013), but not the dividend/payback group.
“It shows the right deal can create a lot of value if executed well. This also highlights that organic investment isn’t being valued by the market right now, resulting in lower returns across those that have invested heavily on large scale projects,” says Downham.
“Given the cyclical nature of the industry, the analysis provides a different output depending on what period the total return is measured against. This reinforces the need for companies in the sector to be making investment decisions on a long-term horizon – the value of organic investment may well be realized over the next few years given the lead time to bring production to market.”
The analysis follows the release of EY’s Capital Confidence Barometer: Mining & metals sector report which shows 73% of mining and metals respondents believe deal volumes will increase in the next 12 months.
The report is based on a global survey of almost 1,600 senior executives in 72 countries, including 143 from mining and metals companies.
“Companies in the sector have generally been cautious and introspective throughout most of this year, but there are signs that for some this may be about to change,” says Downham.
The Capital Confidence Barometer: Mining & metals sector shows 72% of executives in the sector believe the global economy is improving compared with just 57% six months ago.
Similarly, 73% expect deal volumes in the sector to improve in the next 12 months, 55% have growth as their primary focus and 24% intend to pursue an acquisition.
However the valuation gap is likely to remain a challenge, with 82% expecting it to stay the same or widen in the next 12 months.
“Increased price and currency volatility is making deals more difficult and that volatility will continue for the next 2-3 years. This means greater difficulty in matching buyer and seller price expectations,” says Downham.
“Investors who are able to build greater flexibility into transactions will be more successful in completing deals.”
Key findings – Capital Confidence Barometer: Mining & metals sector
- 73% expect deal volumes in the sector to improve in the next 12 months
- 72% believe the global economy is improving compared to 57% six months ago
- 68% say their board is more focused on capital allocation compared to 54% six months ago
- 47% say credit availability is improving
- 55% say growth is their primary focus
- 43% with excess cash plan to invest in growth over the next 12 months
- 52% of organic growth will focus on delivering existing projects or projects in core commodities and existing markets
- 24% plan to pursue an acquisition
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