Mining M&A – are we seeing a shift from build to buy?

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London, 24 July 2012 – Rapidly escalating development costs may herald a shift in focus from build to buy in the global mining and metals sector, says EY’s Global Mining & Metals Transaction Leader, Lee Downham.

EY’s H1 2012 analysis of transactions, financing and capital raising in the sector shows macro economic uncertainty and market volatility have subdued deal value and volume in the six months to the end of June.

Globally there were 470 deals with total deal value of US$55.7 billion for January-June 2012, down 19% and 38% respectively on the same period in 2011.

However, capital that has been earmarked for organic projects is increasingly under review as returns no longer compare favourably to M&A.

“Rising development costs are forcing companies to rethink investment decisions and already we have seen significant deferrals in capital spending. At the same time equity valuations are lower, so it’s likely this will drive opportunistic deal activity,” says Downham.

“Strong balance sheets, favourable long-term fundamentals and lower valuations are creating an attractive environment for cautious M&A. We do not expect to see a big jump in the level of deal activity but momentum is certainly picking up.”

“Macro economic issues and resource nationalism are making decisions difficult, so this means deals are taking a lot longer.”

Downham says opportunistic and “one chance” deals, as well as ongoing domestic consolidation will continue, with an increasing focus on minority holdings and joint venture investments by large producers.

Capital raising & financing
Total capital raised for H1 2012 was down 35% to US$123 billion compared to the same period last year, with the volume of issues down 16%. The number of companies raising capital has nearly halved, combined with a marked decline in equity raising due to market volatility.

“The majors are able to access capital but remain focused on maintaining investment grade credit ratings, driving efficiencies and reducing financing costs,” says Downham.

Funding should continue to be available for quality projects, deals and Boards that demonstrate confidence in expected returns.

IPOs
Total IPO volumes for the sector globally were down 37% to 47 IPOs in H1 2012 compared to H1 2011, while proceeds dropped a massive 80% (excluding Glencore) to just US$0.9 billion.

There were lower volumes, reduced pricing and postponements on all the main mining and metals exchanges of Hong Kong, London, Australia and Toronto.

As Downham explains, “IPOs remain on the corporate agenda but only when markets stabilize. As a result, juniors and explorers are stalling equity raisings and although some are seeking alternative funding outside the public markets, this is nowhere near to bridging the gap”.

Funding may come in part from Asian lenders, made via co-investments in overseas projects with local state partners such as infrastructure developers. Such investment often comes with additional conditions such as share of future off-take.

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