EY - Global mining and metals transactions 2012 trends 2013 outlook

Global mining & metals transactions: 2012 trends 2013 outlook

M&A and capital raising in mining & metals

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During 2012, we witnessed a fall in overall capital raising proceeds for the first year since 2009.

2012: the emergence of a two-tier capital environment

Economic uncertainty created volatility and risk aversion among investors, limiting capital raising options for mid-tier and junior mining and metals companies. However, it generated unique opportunities for the industry’s relative safe havens – the investment grade producers.

“Corporate bonds were the story of the year as companies took advantage of unprecedented investor demand for high grade debt to raise record proceeds.”

– Nicky Crabtree, Assistant Director,
Mining and Metals, Transaction Advisory Services, UKI

Capital raising by asset class – proceeds (2007-2012)

EY - Capital raising by asset class proceeds 2007-2012

Capital raising by asset class – proceeds (2007-2012)

EY - Capital raising by asset class proceeds 2007-2012 ×
  • During 2012 we saw unprecedented demand from high-grade investment funds for primary debt issuance. Such demand was the result of substantial capital inflows from an increasingly risk averse investor universe, set against a backdrop of volatile markets and fragile economic news flow.
  • Investment grade borrowers took full advantage of this flight to quality as they secured long-dated debt capital at pricing levels many banks struggled to match. Investment grade issues totalled $77b for the year, exceeding the 2011 figure of $60b, as the large cap producers raised capital for organic growth and to refinance existing debt.
  • The high yield1 bond market was volatile due to its sensitivity to news-driven sentiment. This limited capital flow to the sector’s mid-tier companies, and increased the cost of borrowing, with average spreads on high yield debt widening by some 200bps compared with 2011.
  • Equity markets suffered in the face of economic and political turbulence. IPO markets were practically closed on anything other than highly-dilutive terms, with a year-on-year 40% fall in volume and 81% decline in proceeds, even excluding Glencore. The $305m IPO of Ivanplats on the Toronto Stock Exchange (TSX) in October was the year’s bright spot.
  • We also saw a significant fall in total loan proceeds to $104b from $187b in 2011, as banks reduced their exposure to risk assets in response to increased capital requirements under Basel III. This was met with less demand from investment grade companies, opting to secure bond finance often on more favorable terms.
  • The reduced availability of bank loans increased borrowing costs and restrictive covenants for all but the largest companies, with average spreads on leveraged loans widening to 391bps above the benchmark, from 266bps in 2011.

The Capital Agenda

Based around four dimensions, it helps mining and metals companies consider their issues and challenges and understand their options to make more informed capital decisions.

1. Preserving capital: reshaping the operational and capital base
2. Optimizing capital: driving cash and working capital and managing the portfolio of assets
3. Raising capital: assessing future capital requirements and assessing funding sources
4. Investing capital: strengthening investment appraisal and transaction execution

How organizations manage their capital agenda today will define their competitive position tomorrow.

  1. 1 Sub-investment grade (“junk” or high yield) debt, considered to have significant speculative characteristics, holding a higher risk of default. High yield is defined as an issue with an S&P rating equal to or less than BB+ and a Moody’s rating equal to or less than Ba1

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