Confidence in super cycle returning to drive mining deals
Chinese mining M&A exceeds $50 billion in the last decade
Sydney, Moscow, 17 February 2010 — A permanent change to deal financing strategies, greater investment from Asian and Middle Eastern buyers and ongoing volatility will characterize the 2010 transactions market in the mining and metals sector, according to Ernst & Young.
Commenting after the release of the firm’s mining and metals sector transactions report, 2009: the year of survival and revival, Ernst & Young Global Mining & Metals Leader Mike Elliott says that although the transaction market in 2010 will remain “challenging” and megadeals scarce, we expect to see growth in the number and size of deals.
“Many mining and metals companies are looking for acquisitions to fast track supply pipelines, driven by confidence in ongoing underlying demand in China and India, as well as supply capacity issues,” says Elliott.
“We believe that this confidence is well-founded, however, post-financial crisis there is still acute market sensitivity to economic signals from China and this will see ongoing volatility in commodity prices and asset values – all of which means a more challenging deal-making environment.
“But perhaps the most profound effect of the financial crisis on the mining and metals sector is that the world has lost as much as two years of growth in the capacity for the supply of scarce resources because of project deferrals and shut-downs.”
Elliott says Chinese, other Asian and Middle Eastern investment in the sector will continue to grow, fuelled by long-term resource security concerns.
“Confidence remains in the return to the super cycle, replacing the traditional shorter cycle, and companies will be using long-term perspectives in doing transactions – but market volatility and the scars of the financial crisis will dampen the appetite for riskier transactions.
“However, given the high proportion of transactions in developed countries in 2009, fewer lower risk projects are now available, forcing investors to consider acquisitions with greater political risk in 2010.
“Capital availability will remain constrained. As a result the complexity and variety of deal structures and alternative financing arrangements, such as partial equity sales and asset swaps, will increase.”
Evgeni Khrustalev, Ernst & Young Partner, Head of the Mining & Metals Group in the CIS, believes that in 2010 about 20 Russian and Kazakh companies of different mining sectors will successfully hold an IPO at the exchanges in London, Hong Kong and Toronto. The local corporate bonds market, however, will be the main source of growth financing for the sector’s companies.
“The re-emergence of equity and bonds to replace debt is another legacy of the financial crisis – 2009 was a record year in the sector for both equity raisings and corporate bonds,” says Elliott.
“It’s likely this will be a permanent shift.”
Elliott says the shift to equity financing will put more pressure on companies to demonstrate expected increased earnings per share on acquisitions.
2009 transactions in the global mining and metals sector – key figures:
- 1047 deals worth US$60.0 billion (compared to 919 deals worth US$126.9 billion in 2008).
- China accounted for US$16.1 billion (27%) of the value of all transactions in 2009.
- Over the past 10 years, Chinese entities have completed 369 deals worth over US$50 billion.
- More than 44% of all deals in 2009 were domiciled in Australia, the US or Canada.
- US$91.2 billion was raised from initial and secondary equity raisings in 2009 and accounted for a record 91% of all capital raisings by volume.
- Corporate bonds issued totalled a record US$61 billion in 2009 – the average bond issue increased from US$269 million in 2008 to US$407 million in 2009.
- Bank loans for 2009 totalled US$62 billion (178 loans), down from US$172 billion (268 loans) in 2008.
- Over half (58%) of bank loans in 2009 were to refinance existing bank debt – just 2% of 2009 bank loans were raised to fund acquisitions compared to over half in 2008.
- Average tenor of bonds issued in 2009 was 8.03 years while the average tenor of bank loans in 2009 was 3.1 years.
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