Mining & metals deal volume, value continues to languish

Monday 16 May 2016

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  • Private capital activity signals start of deal cycle
  • Sellers will need compelling and credible value proposition

First quarter M&A and capital raising numbers confirm the stark reality of the ‘lower for longer’ sentiment in the mining and metals sector, according to EY Oceania Mining & Metals Transactions Leader Paul Murphy.

Murphy’s comments follow the release of EY’s Q1 global capital raising and M&A report, Divestments: extracting hidden value which shows global deal value and volume in the sector continued the five-year downward trend.

Global deal value in the sector fell 45% to US$3.3b in Q1 2016 compared to the same period in 2015. Global deal volume followed the same downward trend with 72 deals in Q1 2016 compared to 90 in Q4 2015.

The numbers tell a similar story for Australia, with the overall value of capital raising in the sector for Q1 2016 US$931m, 58% lower than the same period last year. Deal volume remained at near-record low levels, with just 17 deals for the quarter. Overall deal value was US$1.4b, with two deals (the US$606m Bengalla Coal transaction and US$775 G-Resources Group transaction) accounting for all but 3% of total deal value.

“Financial distress, particularly in the US coal industry, continues to weigh on many companies across the mining and metals industry and it’s playing out in the form of portfolio realignment and divestments to raise capital,” says Murphy.

Gold deals comprised over half of the quarter’s deal value globally at US$1.7b and 46% of the volume at 31 deals. Meanwhile, divestment processes from a number of diversified miners started to close out and accounted for the top three deals of Q1 2016.

Private capital activity signals start of deal cycle

“Cash and sustaining costs continue to be the focus for most players in the sector, and while well capitalised miners will continue to consider acquisition opportunities, we are now starting to see the much anticipated foray of private capital into the sector,” says Murphy.

“Private capital activity is most certainly a lead indicator for growing deal activity. If they are seeing value it is a sign that the deal cycle will begin to pick up.”

Murphy says the tough market and increasing interest by financial investors has put a sharp focus on the level of preparation by sellers.

“Sellers must be able to tell a credible and compelling value story to attract and retain buyer interest, they need to prepare more and sharpen their sales skills if they want to secure a deal and secure the best outcome for shareholders.”

The report notes that over one third of executives (36%) see lack of fully developed diligence materials as the main cause of value erosion in corporate divestments. And, when it comes to factors that induce private equity buyers to reduce offer prices or drop out of bidding, 44% of executives cited lack of confidence in information.

Murphy says divestment programs in Australia and globally will pick up over the coming months, with the need to reduce leverage and make difficult decisions to withstand ongoing volatility.

“We are also seeing increasing interest in the ‘tech’ metals sector – copper, cobalt, graphite, lithium and vanadium – driven by anticipated demand for inputs into electric motors and battery storage,” says Murphy.

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Notes to Editors

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