Restructuring and divestments to dominate mining deals in 2016

Thursday 4 February 2016

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  • Coal transactions to dominate Australian M&A
  • New buyers emerging

Financial restructuring and portfolio optimisation among mining and metals companies will shape merger and acquisition activity in the sector in 2016, with divestments expected to pick up pace on the back of volatility and uncertainty on the timing of a recovery, according to a new EY report released today.

The report, A new normal, or the bottom of the cycle? Mergers, acquisitions and capital raising in mining and metals, 2015 trends and 2016 outlook, notes that after the fifth consecutive year of declining deal volume and values, increasing levels of financial stress and opportunism will trigger more divestments, spin-offs, joint ventures and possibly hostile takeover bids.

Overall mining and metals deal volume globally in 2015 sank to the lowest level since at least 2000, with just 358 deals completed. Excluding the US$8.7b BHP Billiton demerger of South32, overall deal value globally dropped to US$40.0b. In Australia, deal volume more than halved to just 68 transactions in 2015 and overall deal value dropped 10.0% to $4.3b (excluding South32).

EY Oceania Mining & Metals Transactions Advisory Leader Paul Murphy says the coal sector will dominate deal activity in Australia in 2016, with the continuing decline in price squeezing margins and many mines operating at losses.

“There are some excellent top tier coal assets in Australia that are likely to change hands this year. Cost cutting, productivity measures and the benefit of the falling Australian dollar helped delay decisions in 2015 but the weight of corporate debt in an environment of commodity price uncertainty will bring people to the table this year,” he says.

New buyers emerging

Murphy says with social license to operate, environmental concerns and activism influencing the availability of finance for coal assets, a new class of buyer is emerging.

“High quality Australian coal is well positioned to fill the growing energy demand in south-east Asia. Those that understand that, and the cyclical nature of the mining sector, are looking at this opportunistically,” he says.

“It is not just resource-specific private equity, but entrepreneurial buyers from outside the sector with an appreciation of future Asian energy demand, who have a close eye on higher quality Australian coal assets. Those that understand where Australian coal ranks in the future energy mix and the cyclical nature of the business can pick up some tidy assets at cyclically low prices.”

Cost curve positioning paramount for divestments

EY’s report warns that with a glut of assets, scarcity of capital, selective buyers and market conditions forcing some accelerated sales, getting divestment processes right will be paramount to achieving a sale for even the best quality assets.

“A company’s positioning on the cost curve is critical in the current market conditions, so presenting robust information to potential buyers is pivotal to provide confidence that cost reduction and productivity measures are sustainable,” says Murphy.

“Similarly, anticipating transaction risks such as separation and regulatory and joint venture approvals take on greater importance in this market. Prospective buyers are thin on the ground and they will reduce valuations, or even walk away, if these issues aren’t adequately addressed.”

Key mining and metals sector transaction trends expected in 2016

  • More deals will be completed by private capital and other non-traditional buyers, but only quality assets will attract their focus and pricing will remain disciplined.
  • Debt targets will accelerate restructuring and portfolio rationalization.
  • Demergers or spin-offs as a means to package and divest assets have increasingly been featured in boardroom discussions and will remain high on the strategic agenda.
  • Increasingly, mergers and joint ventures will be pursued, with the key focus on de-risking and preserving capital. The necessity to de-risk and preserve capital will drive deals to completion.
  • Ongoing price volatility could see opportunistic takeover bids from better capitalized entities, but only where the takeover target operates desirable, low-cost assets in stable jurisdictions.

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Notes to Editors

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