Longer term fundamentals look compelling for miners Confidence in super cycle returning to drive mining deal
16 February 2010: Following a turbulent 2009 for the mining and metals sector, 2010 will be a year characterised by a greater focus on capital allocation, more innovative deal financing strategies, a continuation of equity raisings, including IPOs and further investment from strategic funds in Asia, according to Ernst & Young’s mining and metals sector transactions report, 2009: the year of survival and revival.
A new era of financing has dawned that will forever be changed
The events of 2008 have fundamentally changed the way the industry will be financed in the foreseeable future. A number of the sector’s leading companies raised finance through a combination of sources to spread the risk and cost of borrowing, and limit the dilution of equity ownership by existing shareholders.
Lee Downham, UK mining and metals leader at Ernst & Young says: “The consequences of over-borrowing and the volatility of cash flow have led companies to seek alternative sources of funding. As a result, the complexity and variety of deal structures will increase with a far greater focus on strategic alliances and realisation of synergies.”
He adds: “The re-emergence of equity is another legacy of the financial crisis – 2009 was a record year in the sector for both equity raisings and this is likely to be a permanent shift.”
Asian investment will continue to grow in 2010
Cash-rich Asian investors emerged in 2009 as the new buyers ready to take advantage of the opportunities that abounded as valuations dropped and struggling companies sought assistance. China alone accounted for $16.1b or 27% of the transactions in 2009. Since 2000 Chinese entities have completed 369 deals worth over $50bn, nearly 80% of these completed in the last two years.
Michael Lynch-Bell, Global mining and metals transactions leader at Ernst & Young says: “The emergence of these new investors, combined with a quick rebound in demand in Asia and prudent spending, allowed the industry to weather the storm of unsustainably low metal prices and emerge into the calm as prices reached more realistic levels. Chinese, other Asian and Middle Eastern investment in the sector will continue to grow in 2010, fuelled by long-term resource security concerns.”
Not surprisingly, total merger and acquisitions values were well below their historic peaks seen in 2007. 2009 saw 1,047 deals with a cumulative value of $60bn, compared to 919 transactions in 2008 with a value of $126.9bn. With significantly lower asset prices 2009 was characterised by small transactions. The handful of very large deals that usually dominate the figures for the year, were conspicuous by their absence.
Downham comments: “Transactions were executed with a higher threshold of acceptable returns and an increased level of due diligence. Only those deals that made the most strategic and commercial sense made it through the heightened scrutiny of the board, shareholders and regulators.
“2010 has begun strongly, continuing the momentum that built up at the end of 2009. We expect the number and size of deals to increase, although megadeals are still likely to remain scarce.”
2010 – Return of the IPO
IPO activity in the sector has fallen significantly since 2007. There were just 70 IPOs in the mining and metals sector in 2009 raising $3b, compared with 118 in 2008 raising $12.4b and 280 in 2007 raising $21.4bn.
Lynch-Bell says: “2009 was not a year for raising primary equity, the severe market turmoil, economic uncertainty and risk aversion that took hold in the second half of 2008 significantly impacted IPO volume in 2009. The IPO market will start to recover in 2010. We could see a return to individual mines being floated, with the proceeds used for development, and investors sharing in the profits when the mine goes into production.
Global financial crisis
Perhaps the most profound effect of the global financial crisis on the metals and mining industry is that the world has lost as much as two years of growth in the supply of scarce resources because of project deferrals and shut-downs.
Downham concludes: “The deferral of projects pending financing will lead to a construction bubble that will compete with other lagging fiscal stimulus for resources. If, as happened after previous recessions, demand rebounds back to its long-term growth rate, the world will discover that metals are once more scarce resources. There will have to be higher product prices, for longer, before the sector responds with new capacity, leading to metal prices increasing sharply – with the potential for deal prices to follow.”
Download the report (pdf, 2.6mb) 7.3Mb, February 2010