Mining M&A remains subdued despite strong deal pipeline
London, 11 August 2014
M&A in the global mining and metals sector is likely to remain subdued for the remainder of 2014 despite a strong deal pipeline and a private capital funds war chest yet to be unleashed, according to EY Global Mining & Metals Transactions Leader, Lee Downham.
EY’s quarterly M&A analysis shows 112 deals in the sector during Q2 this year totaling US$9.5b. Deal volume was down 21% on the previous quarter and down 41% on the same quarter in 2013. Total deal value was up 33% on the previous quarter, primarily due to the US$3.6b acquisition of Osisko Mining Corp. by Yamana Gold and Agnico Eagle Mines.
Similarly, 1H comparisons show total deal values down 69% year-on-year to US$16.7b from US$53.8b, the fourth consecutive year of decline. Deal volumes for 1H 2014 were down 34% to 254, from 386 in 1H 2013.
“Deal making in the sector continues to be cautious, partly due to the continuing commitment to capital discipline, but also due to a lack of urgency over investment given the lack of competition for assets.
“Some standout deals and hostile bids during Q2, combined with a strong deal pipeline and substantial capital waiting to be deployed by mining-focused funds, suggest that momentum is building. For those brave enough to invest against the cycle there would appear to be good buy-side opportunities.”
Divestments feed the pipeline
Major diversifieds are continuing to consider divestments as a way of reducing debt, maximizing returns on capital and optimizing their portfolios; however, stronger balance sheets has taken the urgency out of these deals.
“We do however think divestments of non-core assets from the majors will pick up pace in the next six months. While these assets may not be strategic to the divesting companies, they are typically high-quality assets and will likely attract strong competition, particularly from private capital buyers.”
Acquisitions by financial investors accounted for 20% of all mining and metals deal volumes globally in 1H 2014.
“The much anticipated influx of substantial capital from new mining-focused private funds is taking longer than expected to hit the market. This is partly driven by the complex nature of executing an investment – which takes time regardless of size – but also the lack of competition in the market for deals, with investors happy to wait for clear signs that we are at the bottom of the market before making billion dollar-plus commitments.”
EY estimates the mining-focused private capital funds have a war chest of at least US$10b and possibly as high as US$20b.
Drop in capital raising reflects divergence of fortunes
While there was only a 15% drop in total proceeds raised by companies in the sector globally from 1H 2013 to 1H 2014, from US$168b to US$142b, this masks an ongoing divergence of fortunes within the mining and metals industry.
“The wealth gap between producers and explorers, between those that have access to public debt markets and those that don’t, is still present”.
“The happy coincidence of thirst for yield among bond market investors and competition between banks for scarce major deal opportunities, against a backdrop of near-zero interest rates, has proven a boon for borrowers in recent years. Many larger and mid-tier mining and metals companies have been able to reduce borrowing costs further this year and secure refinancing deals.
“While sub investment-grade borrowers have increasingly had access to this finance as investors have moved further down the risk curve, finance for juniors remains scarce. Junior IPOs are all but non-existent and secondary equity fundraising continues to be muted, with 40% of issue by juniors raising as little as US$500,000 in 1H 2014– barely enough to maintain the most skeletal of operations.”
The performance of juniors tracked in EY’s Canadian Mining Eye and UK Mining Eye indices also paints a mixed picture. EY’s indices shows AIM’s top 20 junior miners lost 18% over 1H 2014 (12% over Q2), while the Canadian Mining Eye gained 24% over the first half (9% over Q2), helped by improved gold and base metals prices and giving some hope that sentiment may be turning.
However Downham says a narrowing of the “wealth gap” between explorers/developers and producers is unlikely to occur in the near-term.
“A sustained and expectation-beating commodity price recovery would be needed for risk investors to return to the exploration sector on mass. In the absence of this the pipeline of future mines continues to shrink.”
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