State-backed and financial investors to drive 2013 mining deals
State-backed and financial investors’ appetite for M&A, combined with divestments, will drive a recovery in mining and metals deal volumes and value in 2013, following a slow and patchy year for deals in 2012, according to Ernst & Young.
Ernst & Young’s report, Mergers, acquisitions and capital raising in mining and metals: 2012 trends, 2013 outlook (pdf, 4.5mb) , – released today – shows there were 941 completed deals with a total value of US$104b in 2012, down 7% and 36% respectively on 2011.
African-focused deals made up 21% of global deal value, an increase from 13% share in 2011. This represented US$20.2b of deals across the continent, although marginally down 3% in absolute terms. South Africa accounted for US$8.5b of deal activity.
Michael Bosman, Director for Mining & Metals Transaction Advisory Services at Ernst & Young, comments, “What is notable from the trends is while South Africa was the top African destination the numbers are somewhat skewed by a small number of large deals.. It also appears that the drivers of many South African deals were different to those in the other less mature African markets, and mainly reflected (a) the outcome of portfolio optimisation by the majors, (b) and industry restructuring driven by cost and labour pressures.”
Globally, however the annual report shows it is the lowest number of deals since 2008 and the smallest by value since 2009 at the height of the financial crisis.
A new class of investor emerges
Ernst & Young’s Global Mining & Metals Transactions Leader, Lee Downham, comments, “Traditional M&A and financing has become increasingly marginalised post-financial crisis as access to capital via debt and equity markets became increasingly constrained. Corporates are now focused on cost-reduction and recycling capital via divestments, and have been less focused on pure M&A.”
“Our analysis shows that the share of deal value by “non-traditional” acquirers has grown year-on-year to account for 31% of total deal value in 2012, compared with just 21% in 2011. State-backed and financial investors account for 69% and 15% of this proportion respectively.”
Downham says financial investors, (private capital, investment funds, sovereign wealth and real estate holding companies), are typically taking “toehold” investments of 10-15% while the increasingly commercially-focused state-backed strategic investors (state owned enterprises) are commonly adopting a larger investment strategy.
Capital strike and divestments
“The capital strike by many mining and metals companies in the face of rising costs and softer prices in 2012 will continue until commodity prices recover sufficiently to encourage new investment. The renewed focus by miners on cost savings and capital optimisation will also see continued divestment of non-core or under-performing assets that began in late 2012,” he says.
“Leaner business models and stronger balance sheets will emerge during the second half of this year. We anticipate that companies will look to re-focus on growth in late 2013 as the pressure to replace depleting reserves and maintain production mounts.”
“The expected shift back to growth will likely be through M&A rather than organic growth, with lower valuations and large cost overruns likely to swing the pendulum back to buy over build.”
Downham says long-term demand for the sector will continue to be driven by China, other BRIC countries and developing nations.
“The rapid cut-back of expansion and capital spending by many organisations is expected to slow long-term supply and prolong a “super-cycle” scarcity premium. Consequently those with access to capital and a long-term view will seek to invest.”
2012 capital raising down
For the first year since 2009, there was an overall decline in the amount of capital raised by the sector – despite an all-time record US$113b raised from corporate bonds, 35% more than in 2011.
During 2012, economic uncertainty created volatility and risk aversion among investors, limiting capital raising options for mid-tier and junior mining and metals companies, but generating unique opportunities for the sector’s relative safe havens – the investment grade producers.
Loan proceeds for the year fell to US$106b as banks continued to reduce their exposure to riskier assets to manage their reserve capital requirements. Of the loans that were closed in 2012, more than half were an extension of existing facilities, meaning that relatively little new bank debt flowed into the sector.
The volume of convertible bonds issued increased from 73 in 2011 to 113 in 2012, but with relatively low proceeds, up from US$2.4b in 2011 to US$3.5b.
IPOs and follow on issues
The total value of IPOs in 2012 was the lowest since at least 2007, with a year-on-year 40% fall in volume and 81% fall in proceeds, even excluding the Glencore float in 2011.
“IPO markets were practically closed on anything other than highly-dilutive terms,” says Downham.
Similarly, widespread risk aversion culminated in a 48% reduction in secondary equity proceeds to US$26b, and a reduction in average proceeds by junior companies to just US$4m, down from US$6m in 2011.
“Equity markets are likely to remain challenging in early 2013 and traditional project debt will continue to be available for only the lowest risk, highest quality projects. While we may see increased bond activity amongst the high yield issuers, ultimately the financing game has changed,” says Downham.
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. This news release has been issued by EYGM Limited, a member of the global Ernst & Young organization that also does not provide any services to clients.
Following on from Ernst & Young’s successful integration in 2008 of 87 countries into one area from across Europe, Middle East, India and Africa (EMEIA), the firm has launched its Africa Business Center™ (ABC), which aims to enhance the effective and efficient links between its geographic reach and areas of expertise. The firm enjoys representation in 33 countries across Africa.
© 2012 EYGM Limited. All Rights Reserved
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.