Mining M&A will be a commodity-by-commodity story

  • Share

Monday 25th May 2015 - Prospective deal-makers in the mining and metals sector should pay closer attention to where individual commodities are in the cycle, according to EY Australia mining and metals transaction leader Paul Murphy.

Murphy says the mining industry is continuing the significant post-boom restructuring phase, with an increasing strategic imperative to do deals setting the scene for new competitors and diverging business models.

EY analysis shows the total value of completed deals in Q1 in the sector globally dropped 18% to US$5.9b compared to the same quarter (Q1) last year, while volume nearly halved year-on-year to 79 deals. For Australia it was a similar picture, with just 17 deals in Q1 with total value of US$125m, down 26% and 52% respectively on the previous quarter (Q4 2014).

“Weak and volatile pricing in the past 1-2 years has been a supply side issue for most commodities and the timing of recovery will be different for each. Base metals are closer to an uptick in terms of supply/demand balance, while structural supply issues remain for many of the bulk commodities,” he says.

Murphy says cost-cutting and productivity improvements across the industry also mean cost curves are rebasing to a new normal.

“Add to this the lower Australian dollar, energy cost reductions and freight rate reductions and it means the industry in Australia will be able to sustain production at much lower commodity prices than they have during the boom phase and the immediate aftermath,” he says.

Murphy says there is now greater confidence among prospective buyers that cost reductions and productivity improvements in the sector are real and sustainable.

“The major variable then becomes commodity price and there are still differences on the outlook for commodity prices and the value sharing between potential buyers and sellers for the introduction of fresh capital – so understanding the supply and demand dynamics of the specific commodity becomes more important in assessing the economics of potential acquisitions,” he says.

“There is no doubt at the moment that iron ore commodity pricing is heavily influenced by the supply side resulting from the boom-driven investment decisions. The same cannot be said for some of the base metals commodities such as zinc and nickel which are sitting at the other end of the cycle and face declining supply and less volatile demand,” he says.

“We are already starting to see that in completed deals, with gold accounting for more than a quarter of all global deals by value during Q1 – and we have continued to see it in announced deal activity.”

Murphy says as confidence in adjusted cost bases grows, and the cycle stage by commodity becomes more apparent, investors, including financial investors, are likely to begin taking stronger positions in the sector.

“We are also seeing some opportunities on the demand side of the equation with a positive growth outlook in India for metals-intensive industries and a lot of interest in strategic metals and rare earths with developments in energy storage technologies,” he says.

EY’s analysis shows financial investors accounted for 28% of global deal volume and 46% of Australian deal volume in Q1, albeit from very low bases.

“Interestingly, buyer competition was identified as a key challenge to deal strategies by more than a third (35%) of the mining and metals sector respondents in EY’s latest biannual Global Capital Confidence Barometer, and once again we expect to see that play out in some commodities earlier than others.”

The Global Capital Confidence Barometer is a biannual survey of more than 1,600 executives in 54 countries, including 63 respondents from the mining and metals sector.

Almost half (49%) of the mining and metals respondents expected to actively pursue an acquisition in the next 12 months, while the same number expect the M&A market to improve – albeit from the decade-low levels of 2014.


Notes to editors

About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the 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. For more information about our organization, please visit

This news release has been issued by Ernst & Young Australia, a member firm of Ernst & Young Global Limited.

Liability limited by a scheme approved under Professional Standards Legislation.