M&A and capital raising in mining and metals

1H 2013

  • Share

M&A and capital raising activity in January – June 2013 (1H 2013) has been subdued.

Management teams across the industry are focused on cost containment, margin improvement and asset optimization at the expense of high risk capital expenditure, acquisitions or exploration.

If 2012 represented the peak of capital spend, then 2013 will come to represent a hiatus and period of retrenchment.

Investors have lost confidence in the mining and metals industry, which remains sensitive to short-term economic news flow. This trend is driving funds out of mining and metals equities and into other industries.

The tension between sellers’ and buyers’ expectations remains high. A sign of sustained improvement in commodity prices may be the trigger needed to accelerate competitive buying activity of the many divested assets coming to market.

Key themes:

M&A overview
EY - M&A overview
*"GX" — Glencore International and Xstrata merger.

  • During 1H 2013, there were 350 deals worth US$78.6b.
  • Deal volume over 1H 2013 was down (30%), but value up (41%) due to a handful of mega deals (>$1b).
  • North America was both the preferred destination ($19.8b) and the most active acquirer ($21.5b), with largely domestic consolidation in Canada and the US.
  • Gold was the most targeted commodity in 1H 2013 by value ($8,601m) and volume (124).
  • Mining IPO volumes and proceeds have fallen to unprecedented lows — 12 IPOs in 1H 2013, raising just $459m.
  • Equity proceeds from follow-on equity issues by juniors have nearly halved year-on-year, to just $2.9b. Bond proceeds raised in 1H 2013 have fallen 12% year-on-year, but remain high at $50b.
  • Syndicated loans have shown a 46% year-on-year increase, primarily due to some large-scale refinancings by the majors.

M&A trends and outlook

Low valuations, divestitures and cash-strapped juniors have set the stage for a buyers’ market. However, mining and metals companies remain risk-averse in an environment of macroeconomic and geopolitical uncertainty, pointing to the third consecutive year of declining deal volumes for the sector.

The reversal in cross border activity so far this year also highlights the trend of companies to minimize risk exposure by investing domestically.

There has been an absence of interest from the majors, and only a few mid-tier buyers with adequate financial means. Non-traditional investors are increasingly targeting the resources sector as a means to diversify their portfolios, hedge against rising inflation risk and potentially generate significant capital gains.

Asian state-owned enterprises (SOEs) will remain strong contenders for mining and metals assets of strategic interest. Minority stake sales and consolidation are expected to be continuing trends among mid-tier and junior companies as they struggle to survive difficult market conditions.

Capital raising trends and outlook

The capital raising environment in 2013 is marked by volatility and appears to be punishing the mining and metals industry more than others.

Global mining and metals equities are continuing on a steep downward trajectory, underpinned by a lack of investor confidence both in the global demand outlook and in companies’ ability to deliver acceptable returns.

Continued commodity price weakness, particularly in gold, has further undermined confidence.

Determined developers and mid-tiers are getting creative in the variety of funding structures and sources being used. Companies are seeking options that avoid further dilution unless long-term strategic value is attached.

Mid-tier industry growth in 2013 has been funded by:

  • Streaming and royalty deals
  • Development funding
  • Offtake-linked pre-financing
  • Mergers
  • Joint ventures
  • Divestments
  • A combination of these approaches

We anticipate greater consolidation at the junior and mid-tier level as critical mass becomes increasingly important for accessing project funding. We also expect the continued injection of capital from private capital, offtakers and specialist finance providers.