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In a diverging market, what path will you carve?

Mergers, acquisitions and capital raising in mining and metals

2Q17 trends and 2017 outlook

M&A activity has almost doubled over 1H17 compared to same period in 2016, and the share of Chinese deals dropped significantly, highlighting geographical diversity of deals.

While market participants continued to employ capital mainly for refinancing and working capital purposes, a few noteworthy deals across the industry and various regions are emphasizing a changing perspective from debt reduction to strategic transactions.

M&A trends and outlook

The general uptick in M&A activity continued over the first half of 2017 with the value of M&A transactions almost double that of the first half of 2016. Deals increased by 71% year-on-year to US$14.8b in 2Q17, a 13% increase from the previous quarter. The share of Chinese deals dropped significantly, from almost 70% of deal value in 1Q17 to just 15% (US$2.1b) in 2Q17.

The return to growth and reduced industry leverage is shifting the drivers of M&A from divestment of non-core assets to strategic transactions. There have been a number of eye-catching deals across the industry such as the Stillwater Mining and Sibanye Gold merger and Volcan investments (owned by Vedanta CEO, Anil Agrawal) acquiring an 11% stake in Anglo American.

Corporate activity across the precious metals sector drove the bulk of activity. Mid-tier gold producers were active in both buying and selling of assets in their push for optimizing operations, lowering costs and generating synergies, particularly in Latin America.

EY - Mergers and acquisitions - value and volume: (2010-2Q17)

EY - Value of deals by target commodity 2Q17 (US$b)

Outlook for the remainder of 2017

We expect to see continued activity in the coal sector. The value of such deals are likely to dominate in the coming months on the back of a number of deals in progress across Australia and the US, including the pending sale of Rio Tinto subsidiary, Coal & Allied. There are also improving prospects for deals in steel outside of China, with the acquisition of ThyssenKrupp’s Brazilian business by Ternium already in the pipeline.

Although blockbuster deals are unlikely over the coming months, we continue to expect management boards to continue to actively screen acquisitive growth deals that have the potential to create unique shareholder value.

The improvement in balance sheets and associated concern over capital returns, will likely see shareholder pressure and, potentially, further attention from activist investors.

Capital Raising trends and outlook

Global aggregate capital raised increased by 15% year-on-year to US$71b in 2Q17, roughly US$20b higher than proceeds recorded in 1Q17. China’s dominance of capital raising activity has slowed, accounting for just US$1.3b (7.5%) of the quarter-on-quarter increase. Regions like EU28, CIS, Oceania, South America and Africa all saw increases of at least US$1.5b in capital raised, highlighting improving credit conditions for the sector globally.

EY - Capital raised - value and volume (2011-2Q17)

EY - Capital raised by asset class - proceeds (US$b) Five-year trend

Miners generally continued to employ capital for refinancing and working capital purposes, with limited funds raised for growth projects. Debt markets remained active as improving credit conditions offered opportunities to reduce cost of debt through refinancing. 2Q17 also saw a divergence in strategies employed by miners to raise capital.

Gold players, sensing limited dilution and possibilities to fund growth projects, have been actively issuing equity, accounting for roughly two thirds of the follow-on equity issued in 2Q17.

In the coal sector, buoyant prices and a favourable regulatory environment under the Trump administration have seen financers warming up to the sector after being shut out in 2015. US coal miners raised US$1.4b in loans and US$0.3b in IPOs. Chinese coal producers, meanwhile, opted for bond markets, raising roughly US$9b.

EY - Capital raised by asset class - proceeds (US$b) Quarter-on-quarter trend

Outlook for the remainder of 2017

We believe there will continue to be a focus on reducing cost of capital over the remainder of the year, whilst working capital investment will remain core. However, it’s unlikely that debt reduction will remain a priority for the large producers given the balance sheet recovery of the last 12 months. Should the sector pay down debt at the same rate as 2016, Net Debt/EBITDA ratio would fall below 1 for the first time in five years, based on consensus earnings. Most miners have already signalled a return to dividends but shareholders will certainly be looking at Total Shareholder Returns relative to other asset classes. Miners will therefore have to switch to growth to enhance their portfolios.


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The data includes completed deals only and is primarily sources from ThomsonONE.