Global mining & metals transactions: 2012 trends 2013 outlook

M&A: a new investor class

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M&A itself used as a source of finance during 2012

Traditional M&A and financing has become increasingly marginalized post the global financial crisis (GFC), as:

  • Corporates have been less focused on pure M&A
  • Access to capital via bank lending and equity markets became increasingly constrained

As a result, non-traditional sources of finance have grown in prominence. The share of deal value for these acquirers has grown year-on-year to account for 31% of total 2012 deal value, compared with just 20% in 2011.

“The funding gap is being filled by private investors and SOEs who may not be dislodged from their newfound positions once the cautionary investment environment recedes and traditional investors return to the sector.”

– Mike Elliott
Global Mining & Metals Leader, EY

Illustration of the growth of the non-traditional investors’ share of industry financing and M&A (not to scale)

EY - Illustration of the growth of the non-traditional investors share of industry financing and M and A (not to scale)

Illustration of the growth of the non-traditional investors’ share of industry financing and M&A (not to scale)

EY - Illustration of the growth of the non-traditional investors share of industry financing and M and A (not to scale)


A new investor class emerging

In value terms, state-backed and financial investors accounted for 26% of total M&A activity in the sector during 2012, compared with just 14% in 2011, as this growing class of investor increasingly participates in, and facilitates, the growth of the industry.

In addition to the state-owned enterprises (SOEs) and sovereign wealth funds (SWFs), which are primarily looking to secure the strategic supply of materials, other financial investors, which believe the sector is currently undervalued, appear to be seeking pure financial returns from anticipated future upside to the current cycle.

An emerging valuation gap

Buyer and seller agreement on deal valuation has become increasingly difficult to bridge in 2012 due to:

  • Volatility of commodity prices
  • Growing divergence between mining and metals equities and commodity prices

Sellers have been unwilling to accept lower valuations based on their depleted share prices in 2012, looking back at 52-week highs and expecting healthy premiums.

This divergence is causing longer, more complex deal negotiations, resulting in sluggish M&A. Chinese private equity firm Cathay's Fortune's now-lapsed hostile takeover bid for Australian copper junior, Discovery Metals, is a prime example.

Due to these factors, both the value and volume of M&A completed in the mining and metals sector has decreased. During 2012, 941 deals amounting to $104b completed, representing a year-on-year decrease of 7% and 36% respectively.

Volume and value of deals by size (2003 – 2012)

EY - Volume and value of deals by size (2003-2012)

Challenging trading conditions

The mining and metals sector is facing some of the most challenging trading conditions since the GFC. Commodity prices have softened and operating and capital costs have soared, resulting in squeezed margins.

Additionally, the investment grade producers have become victims of their own success. The prior years of strong growth, prudent balance sheet management and exposure to emerging market demand attracted a new breed of investor to share registers. During 2012, these investors have shown greater conservatism and are demanding shorter return timeframes for new investments.

Applying this mindset to investment decisions in a capital constrained and challenging trading environment prompted many companies to re evaluate their priorities during the second half of 2012: a capital strike was declared. Capital projects were rationalized and deferral plans were implemented on all but the most important top-tier projects.

Relative commodity price performance (rebased at 1 January 2012)

EY - Relative commodity price performance rebased at 1 January 2012

Source: Thomson Datastream

Companies also continued to review their portfolios and announced the divestment of non-core assets. Vale, Rio Tinto and BHP Billiton all announced divestment plans.

M&A activity, for the most part, was lower down the agenda for the mining and metals majors; and the M&A completed primarily took the form of the consolidation of existing stakes in assets.

Please note - The data in this report is primarily sourced from, and unless otherwise stated, all values are in US dollars.

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