Mining through the cycle: exchange performance comparison
M&A and capital raising trends in mining and metals 3Q16
M&A and capital raising activity remained lackluster in 3Q16, indicating that transaction activity will continue its overall four-year-long downward trend in 2016.
Mergers and acquisitions (M&A) trends
With some improvement in commodity prices and broader market sentiment, there was a modest increase in M&A activity during 3Q16.
Deal value was flat at US$7.9b but volume was up 12% to 121 deals compared to 2Q16. However, overall value in the first nine months of the year remains down, retreating 43% year-on-year.
Most traditional industry acquirers are still focused on portfolio realignment rather than acquisitions for future growth. Divestments continued during the quarter.
We also expect to see greater vertical integration and possibly diversification deals as smaller companies seek other opportunities — up, down and even outside of their existing value chain.
Capital raising trends
The total amount of capital raised across the sector has been in steady decline since 2013 and, at this point in the year, it appears the trend will extend. Total capital raised was US$49.9b in 3Q16, down 17% from US$60b in 2Q16.
Capital raised was also down 3% to US$172.2 in the first nine months of the year, compared to the same period in 2015.
This doesn’t necessarily reflect worsening conditions in the sector as the decline could indicate an improvement in commodity prices over the last two quarters, which has eased the need for refinancing.
Consistent with trends in recent years, there has been relatively little capital raised via equity markets, representing just 14% of total proceeds. The vast majority were follow-on issuances, with the major exchanges still seemingly closed for IPOs across the sector. The largest portion of new capital raised was via loans and bonds.
The outlook remains very challenging for equity markets, with no sign of change in investor sentiment on the horizon. This will restrict growth capital to debt markets, alternative forms of finance (such as streaming, offtake and pre-pays) and private capital.
With the industry generally benefiting from some recovery in commodity prices during Q316, the picture is an improving one. But, we believe there is still a long way to go before we see a return of significant risk capital to the sector.
Comparative trends on the global exchanges
This paper illustrates the types of analyses that can be instantly produced using the PCP when used as an exchange selection tool, and highlights several interesting findings when you compare the relative performance of the exchanges between 2007 and 2015.
Primary listings destination
The ASX and TSX dominate as the primary listing destinations of choice, with 31% and 30%, respectively, of the total primary listings. This may be due to both investors’ familiarity with mining and metal companies and the proximity of the investors to the assets.
The weighting of primary listings by commodity groups5 are relatively evenly spread among the exchanges with the exception of the following:
- Bulk metals
- Precious metals
One of the primary determinants of exchange selection can be the country of origin of the company listings. The TSX, TSX-V and NYSE are favored by North and South American companies, while the ASX is favored by Oceania-based companies. However, the exchange selection of companies based in Africa and Asia-Pacific is more diverse.
African-based exploration companies generally have a primary listing on the TSX-V, TSX or ASX. The Canadian exchanges usually attract a high proportion of retail investors, who are more willing to finance early exploration companies if they have management teams with a past track record.
This contrasts with other mid-market exchanges, such as the LSE, which have a higher proportion of institutional investors who prefer companies with a stronger track record, albeit the AIM exchange is focused on earlier stage operations.
Impact of the global financial crisis and commodity price crash on the exchanges
The trend in average market capitalization for mining and metals companies between 2007 and 2015 is consistent among all the exchanges.
They have been heavily impacted by the global financial crisis of 2008 and steadily declining post-2010 as commodity markets softened on the back of falling Chinese demand growth.
Perhaps most interestingly, the market shocks of the past eight years have not led to a reduction in liquidity, with the average daily trading volumes of mining and metals stocks increasing every year except FY2012, demonstrating continued investor focus on the sector.
Relative financial performance and position
The decline in earnings across the sector post-2010 has led to a widespread increase in leverage, along with an inevitable fall in market capitalization. On average, across the exchanges, the net debt to market capitalization ratio increased from 0.2:1 (i.e., a net cash position) in FY2007 to 0.4:1 in FY2014.
While market capitalization continued to decline in FY2015, actions taken by companies to reduce net debt through slashing capital expenditure, cost-cutting initiatives and divestment of non-core assets reduced the average ratio to 0.3:1.