Appetite for mining deals remains strong, despite volatility

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  • Q1 2012 value and volume down, increased number of megadeals

LONDON, 08 May 2012 – Continued volatility is impacting the level of mining and metals sector M&A activity but a strong pipeline indicates miners are showing an appetite to do deals, according to EY’s Global Mining & Metals Transaction Leader, Lee Downham.

While Q1 2012 deal volume was on par with Q4 2011 activity and in value terms 10% lower, M&A volume and value were down 34% and 20% respectively on Q1 2011.

“However, there is a strong deal pipeline – not least of which the proposed merger of Glencore and Xstrata – which indicates a sustained appetite to do deals,” says Downham.

“Miners are increasingly unwilling to sit out the volatility and are prepared to act opportunistically and strategically. Robust long term demand fundamentals and strong balance sheets will drive deal activity through 2012.”

“Relatively lower valuations in today’s uncertain environment are attracting investor interest. It will be fitter and faster companies that will be best placed to maximize the opportunities for transactions this year.”

Downham says the drivers for M&A in the sector, globally, include the need to secure raw materials, as well as companies seeking to increase penetration in growth markets, achieve greater vertical integration and consolidate market share.

“This year is emerging as a year of extremes, with a greater number of megadeals in Q1 2012 compared to Q1 2011 but with a lower average deal size due to the smaller size of the majority of deals,” he says.

“The number of megadeals reflects the scarcity of large, quality assets and fierce competition for them, while the large number of smaller deals reflects an increasing interest in exploration projects.”

Mining and metals companies completed ten mega deals – deals over US$1billion – in Q1 2012, twice as many as in the same period in 2011.

Average deal size for the quarter was US$130million, down from US$134million compared to Q1 2011 and down from US$150million compared to Q4 2011.

Canada regained its position as the top ranked target destination by total deal value in Q1 2012, with the majority of deals small domestic transactions targeting junior explorers and mineral properties.

China was the second most targeted destination as well as the largest acquirer by deal value, with the majority of Chinese deals domestic transactions primarily driven by consolidation activity.

IPOs

The number of mining and metals listings globally for Q1 2012 was just 17, just over half the 31 IPOs seen in Q1 2011 and down on the 28 listed in Q4 2011.

“This obviously reflects the ongoing difficult conditions in equity markets, a trend seen globally across all sectors, not just mining and metals,” says Downham.

Hong Kong Stock Exchange hosted the two largest listings, Xiwang Special Steel and Kinetic Mines & Energy, accounting for 83% of total Q1 2012 IPO proceeds, while the Toronto Stock Exchange and Australian Stock Exchange accounted for most by volume, mostly junior exploration listings.

At a glance: Q1 yearly comparative mining and metals transactions

Quarter

Q1 2010 

Q1 2011 

Q1 2012

Volume 

299 

297

195

Value (US$m)

18,116  

31,572 

25,310

Average value (US$m)

61 

134 

130