State-backed and financial investors to drive 2013 mining deals

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London, 19 February 2013 — State­-backed and financial investors’ appetite for M&A, combined with divestments, will drive a recovery in mining and metals deal volumes and value in 2013, following a slow and patchy year for deals in 2012, according to EY. 

EY’s report, Mergers, acquisitions and capital raising in mining and metals: 2012 trends, 2013 outlook shows there were 941 completed deals with a total value of US$104b in 2012, down 7% and 36% respectively on 2011.

The annual report shows it is the lowest number of deals since 2008 and the smallest by value since 2009 at the height of the financial crisis. 

EY’s Global Mining & Metals Transactions Leader, Lee Downham, says deal activity will pick up in 2013. 

“We will see the continued rise of strategic and financial buyers in the sector throughout this year, motivated by the need to secure long-term sources of mineral supply and the prospect of quick returns respectively,” he says.

A new class of investor
Downham continues: “Traditional M&A and financing has become increasingly marginalized post-financial crisis as access to capital via debt and equity markets became increasingly constrained. Corporates are now focused on cost-reduction and recycling capital via divestments, and have been less focused on pure M&A.” 

“Our analysis shows that the share of deal value by “non-traditional” acquirers has grown year-on-year to account for 31% of total deal value in 2012, compared with just 21% in 2011. State-backed and financial investors account for 69% and 15% of this proportion respectively.”

Downham says financial investors, (private capital, investment funds, sovereign wealth and real estate holding companies), are typically taking “toehold” investments of 10-15% while the increasingly commercially-focused state-backed strategic investors (state owned enterprises) are commonly adopting a larger investment strategy. 

Capital strike and divestments
“The capital strike by many mining and metals companies in the face of rising costs and softer prices in 2012 will continue until commodity prices recover sufficiently to encourage new investment. The renewed focus by miners on cost savings and capital optimization will also see continued divestment of non-core or under-performing assets that began in late 2012,” he says. 

“Leaner business models and stronger balance sheets will emerge during the second half of this year. We anticipate that companies will look to re-focus on growth in late 2013 as the pressure to replace depleting reserves and maintain production mounts.” 

“The expected shift back to growth will likely be through M&A rather than organic growth, with lower valuations and large cost overruns likely to swing the pendulum back to buy over build.”

Downham says long-term demand for the sector will continue to be driven by China, other BRIC countries and developing nations. 

“The rapid cut-back of expansion and capital spending by many organizations is expected to slow long-term supply and prolong a “super-cycle” scarcity premium. Consequently those with access to capital and a long-term view will seek to invest.” 

2012 capital raising down
For the first year since 2009, there was an overall decline in the amount of capital raised by the sector – despite an all-time record US$113b raised from corporate bonds, 35% more than in 2011.

During 2012, economic uncertainty created volatility and risk aversion among investors, limiting capital raising options for mid-tier and junior mining and metals companies, but generating unique opportunities for the sector’s relative safe havens – the investment grade producers. 

Loan proceeds for the year fell to US$106b as banks continued to reduce their exposure to riskier assets to manage their reserve capital requirements. Of the loans that were closed in 2012, more than half were an extension of existing facilities, meaning that relatively little new bank debt flowed into the sector. 

The volume of convertible bonds issued increased from 73 in 2011 to 113 in 2012, but with relatively low proceeds, up from US$2.4b in 2011 to US$3.5b. 

IPOs and follow on issues
The total value of IPOs in 2012 was the lowest since at least 2007, with a year-on-year 40% fall in volume and 81% fall in proceeds, even excluding the Glencore float in 2011. 

“IPO markets were practically closed on anything other than highly-dilutive terms,” says Downham. 

Similarly, widespread risk aversion culminated in a 48% reduction in secondary equity proceeds to US$26b, and a reduction in average proceeds by junior companies to just US$4m, down from US$6m in 2011. 

“Equity markets are likely to remain challenging in early 2013 and traditional project debt will continue to be available for only the lowest risk, highest quality projects. While we may see increased bond activity amongst the high yield issuers, ultimately the financing game has changed,” says Downham. 

About EY 
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