Subdued mining M&A continues, competition for capital remains fierce

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EY’s latest quarterly mining deals analysis, Mergers, acquisitions and capital raising in mining and metals 1H 2015, reflects investor caution in the sector and underscores the lack of capital available to junior and mid-tier miners, according to EY Oceania Mining & Metals Transactions Leader Paul Murphy.

In Australia there were just 14 deals in Q2 2015, with total deal value of US$81m (excluding the US$8.7b BHP Billiton demerger of South32) – down 19% and 35% on the previous quarter by volume and value respectively.

Globally, there was a 2% increase in quarter-on-quarter deal volume to 86 deals and a 13% increase in total deal value to US$21.4b (excluding South32).

Murphy says for the remainder of 2015, mining deals in Australia are likely to be centred on ongoing gold sector consolidation and potentially rationalisation of the coal sector.

Capital raising for 1H15 was notable for a marked increase in follow-on equity raisings, bond issues and convertible bonds, in stark contrast to the stagnant IPO market.

The largest share of unrated and junior issues in 1H 2015 occurred at the sub-US$1m, with 42% of all follow-on funding rights issues globally on the ASX, with proceeds earmarked for general corporate purposes, working capital and small amounts for mining exploration.

“Unlike the smaller end of the market the majors are typically in a position where they can raise funds and can do so at relatively low cost if the need arises,” says Murphy.

“However competition for capital is fiercer than it has ever been, with junior and mid-tier miners grappling with the challenge of risk-averse equity markets and highly selective lenders.”

Not surprisingly, access to capital is regarded as a top three business risk for the sector and the number one risk for mid-tier and junior miners.

Market conditions in recent years have facilitated the rise of alternative sources of finance, such as streams, royalties, high-yield bonds, pre-finance offtake and equity-linked instruments.

“These have provided much-needed capital but come with additional complexity and risks. Poorly considered financing strategies could ultimately be value destructive, so careful evaluation is required no matter how desperate for capital you are,” says Murphy.

Murphy says juniors and mid-tiers should also re-assess working capital to potentially free up more cash and re-examine GST fuel rebates and R&D incentives to ensure they are accessing all capital they are entitled to.

“Beyond this, these companies need to make their projects stand-out from the competition to attract the eye of counter-cyclical investors and be transaction-ready for when opportunities arise.”

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