Transform (invest): innovate to stay ahead
Those who invest in technology, data analytics capabilities and operational transformation will have an edge over their competitors. According to the respondents of our Business risks facing mining and metals in 2019-2020 survey, the majority of miners are investing 5% or less of their capital expenditure in digital technologies. How much more could they be optimizing and transforming their operations if they invested up to 20% of their capex budgets in digital and put capital at risk? This increased investment could be disruptive to the way mining and metals organizations operate, giving a distinct competitive advantage to early adopters.
What to expect in 2019?
M&A activity will continue to grow through 2019 on the back of a steady period of growth in deal value over the last three years and a general belief that the sector cannot continue to return cash and sell off assets — deals will continue to shift from being divestment-led to investment-led with a focus on replenishing portfolio growth options. Premium valuations may be on the return for world-class assets after a sustained period of risk-averse valuations.
Commodities — We expect to see significant consolidation in the gold sector. We also expect bulks to be relatively busy with some further ownership changes in the coal sector and iron ore pricing to drive corporate activity on the back of the disruption currently experienced with Brazilian supply. Copper will remain a key focus for M&A and arguably the most strategic M&A driver, but with limited options available, copper deals may need significant premiums to get over the line.
Geopolitical influence — The sector has predominantly focused investment in low-risk geographies, such as Canada and Australia, and we expect this to continue. However, as investors look to secure long-term growth options, we will increasingly see deals in countries that are perceived to have higher risk profiles where the deposit represents a world-class asset with scale.
License to operate (LTO) — As the number one risk in the mining and metals sector, this will remain front of mind when performing due diligence on potential acquisition targets or investing in new projects. Any investment will be predicated on a well-defined strategy on working with local governments and communities to ensure the project has the full support and cooperation of those impacted by it.
Balance sheets have been strengthened over recent years, and increased flexibility introduced through refinancing of short-term maturities into longer-dated instruments. Free cash flow projections look strong in the short to medium term due to limited new supply, and that is providing the sector with an opportunity to manage investment capital in such a way that avoids financial risk being reintroduced. For many participants, that translates into a policy of only reinvesting capital generated from existing operations. For others, there is capacity to introduce additional debt or bring in a strategic JV partner.
Type of financing — An increasingly important factor in capital raising will be the concept of social license to operate, which investors see as a key risk factor impacting the ability to raise capital. Risks associated with environmental policies and safety will take a greater role in the diligence undertaken around capital investment decisions.
Investment into new projects is on the rise. A number of acquisitions in 2018 were for early-stage projects, which suggests a need for capital raising over the short term in order to bring these projects into production. While we have seen many players opting for debt to fund projects, mining and metal companies are also looking to balance risk by opting for JV agreements with strategic players and resource funds.
However, capital allocation can be subjective (e.g., the relative risks of investing in coal vs. battery minerals) as mining and metals companies need to demonstrate the financial viability of a project while ensuring LTO obligations are fully embedded.
Notable transactions trends in 2018
M&A deal value was up by 51% y-o-y to US$77.8b, the highest recorded deal value in the last five years.