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Mergers, acquisitions and capital raising in mining and metals – 2018 outlook

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Key insights

  • Will stronger balance sheets fuel miners’ growth ambitions?

    The focus for most of the sector in 2017 was consolidating balance sheet strength and maintaining capital discipline. Mining and metals companies were also focused on optimizing portfolios. Divestments remained a significant driver of M&A transactions as non-core assets were spun off in favor of leaner, more consolidated portfolios.

    Stronger financial health enhanced companies’ options in accessing financing for growth through consolidated and strategic transactions. The healthy outlook for the mining and metals sector has not only boosted access to debt but also improved the ease of raising finances via equity markets.
  • Focus shifts to shareholder value creation

    With strong cash generation, sector capital allocation decisions are increasingly investment focused, rather than geared toward financial resilience. With significant levels of cash returned to shareholders during 2017, the focus will now shift to growth with a balanced capital agenda. Moreover, this balanced capital agenda will cater to both the short-term needs of shareholders and the long-term sustainability of shareholder returns.

    The ease of securing funding for the growth agenda has also improved markedly. Key to competitiveness and sustainable value creation will be achieving the right mix of capital, which balances near- and long-term liquidity with flexibility and at an optimal cost.
  • Future demand: electric vehicles and battery minerals

    Many of the world economies are introducing measures to reduce the reliance on internal combustion engines. In response, car manufacturers have been shifting their focus to the development of EVs and investing in battery technology. Sales of electric cars are forecast to exceed diesel cars as early as May 2019.1

    EY - Policies boosting rapid acceleration of EV demand

    Key metals in the batteries powering these EVs are cobalt, lithium and nickel. Supply of these metals is not expected to meet forecasted demand. Increased interest is expected in assets producing fourth generation metals from car manufacturers that are looking to invest in mines to source materials for their EVs.
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M&A trends in 2017

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There was a noticeable increase in deal value across the mining and metals sector in 2017, marking the highest value of completed deals since 2013. However, while deal value rose by 15% year-on-year to US$51b as deal drivers shifted from divestment led to strategically focused, the volume of transactions fell by 6% year-on-year.

EY - Mergers and Acquisitions - value and volume (2008-2017)

With metals prices largely holding up, cash generation remained incredibly strong across the sector, allowing leverage to be further reduced, dividends restored and significant cash returned to shareholders through buyback programs. Alongside this capital discipline, we began to see the emergence of investment strategies, with capital earmarked for organic projects and increasingly considered for acquisitions.

China tops activity

China continued to be a key driver of activity, leading deals by value both as an acquirer (US$18.7b, 36.5%) and as a target (US$13.6b, 26.6%). These were mainly domestic steel and aluminium mergers aimed at industry consolidation to drive efficiency across the metals sector.

Portfolio management the key driver

Portfolio realignment was prominent as the diversified producers looked to divest those assets no longer considered core to the business and to free up capital.

Commodities diverge

Coal and steel were the main drivers of deal value, with coal acquisitions up 156% on 2016 to US$8.5b. This is due to a number of thermal coal divestments from the large, listed producers looking to reduce exposure as the energy mix moves toward renewables. Steel transactions doubled in value to US$13.3b, the bulk of which (US$9.3b) comprised the large Chinese mergers and divestments in Latin America.

EY - Value of deals by target commodity 2017 (US$b)
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Last year we saw fewer deals but at better values. In 2018, we expect to see more deals supported by investment-led strategies to diversify by commodity or region. Some of this activity will be to shape portfolios for future growth and sustain shareholder returns.”

Lee Downham, EY Global Mining and Metals Transactions
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M&A outlook for 2018

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With stronger balance sheets across the sector, miners are increasingly returning to an investment-led strategy, which is driving a renewed focus on building portfolios that deliver sustainable shareholder returns.

  • The key drivers for 2018 will be pipeline replenishment, synergistic volume growth and next-generation mineral demand.
  • With the buzz around new world critical minerals and battery technology, deals in lithium, copper and cobalt are expected to feature high on the agenda of management teams across the industry.
  • Activist investors, meanwhile, will continue to shape miners’ strategies, affecting the choice of commodity portfolio and volume of ambitions.
  • Continued pressure to reduce the reliance on fossil fuels will lead to further divestments or spin-offs.
  • In China, having seen the completion of large-scale steel mergers, similar merger activity in coal is also expected as the country starts to target raw materials in its environmental initiatives.
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Capital raising trends in 2017

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Access to capital improves as mining and metals companies’ performance mirrors firming commodity prices. Mining and metals companies maintained capital discipline in 2017 as they continued to control expenditure on growth, sustain capital and minimize operational costs. Despite improved access to capital, the focus was largely on short-term needs, such as working capital and refinancing requirements.

A broad distribution of capital raising activity globally marked a departure from the previous year where China dominated. China was responsible for just under a third of capital raised, down from 40% year-on-year.

Demand for alternative sources of financing, such as streaming, royalties and offtake agreements, softened in 2017. Strengthening fundamentals and availability of cheaper options enabled most industry participants to once again opt for more flexible, traditional financial instruments.

EY - Capital raised - value and volume (2013-2017)

Spotlight on capital structure and return to growth

Mining and metals companies have significantly de-leveraged, using cash proceeds from the recovery of commodity prices in 2016. While there is still scope to retire expensive instruments in favor of cheaper and flexible facilities, further reduction of debt at the pace of recent years is unlikely.

In 2017, most majors began restoring dividends; however, returning cash alone will not be sufficient in the journey toward sustainable value creation. Companies will look to growth either through investing in pipeline projects or through acquisition of other assets, provided they complement existing portfolios. This will likely trigger equity raising through both initial listings and secondary equity offerings.

Demand for debt instruments remained unchanged year-on-year in 2017 despite the easing of credit conditions for mining and metals companies. Improved equity valuations, however, saw increased IPOs and issuance of follow-on equity.

EY - Capital raised by asset class - proceeds (US$b) Five-year trend
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Access to capital improved significantly in 2017. In 2018, we expect stronger demand for financing and flexibility to remain important as the sector seeks to maintain a balanced and efficient capital structure.”

Hopewell Mauwa, EY Global Mining & Metals Transactions
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Capital raising outlook for 2018

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  • As focus shifts from debt reduction to creating shareholder value, companies’ lending requirements will adjust. Increasing productivity as demand for metals improves will mean more working capital requirements for many companies, while others may refinance high cost facilities negotiated during the distress period.
  • A return to investment across the sector will be the major driver of new bond issuance in the near term and also a key driver for secondary listings in 2018.
  • The expected stabilization of the commodity pricing environment should fuel more equity listings across a number of commodities.
  • And rising demand for battery technology metals is expected to drive fund-raising for project expansions in 2018.

1 “Electric cars already cheaper to own and run than petrol and diesel study,” The Guardian, 2 December 2017.
2 “France to ban sales of petrol and diesel cars by 2040,” The Guardian, 6 July 2017.
3 “These countries are banning gas-powered vehicles by 2014,” Business Insider, 23 October 2017.
4 “China sets 2019 deadline for automakers to meet green-car sales targets,” Reuters, 29 September 2017.

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