Does tomorrow’s success depend on being bold today?

Authors

Lee Downham

EY Global Mining & Metals Transaction Advisory Leader

Advising on transactions for EY Mining and Metals clients since 2004. Focused on buy-side and sell-side due diligence and public market listings.

Andrew van Dinter

EY Global Mining and Metals Tax Leader

Trusted tax advisor focused on the mining and metals industry. Corporate strategist with experience across the globe. Team leader passionate about developing a business understanding.

3 minute read 3 Apr 2019

Stronger financial health has enhanced mining and metal companies’ options in accessing financing for growth. What choices will you make?

The healthy outlook for the mining and metals sector has not only boosted access to debt but also imporved the ease of raising finances via equity markets. With strong cash generation, sector capital allocation decisions are increasingly investment focused, rather than geared toward financial resilience. The focus is shifting to growth with a balanced capital agenda. Moreover, this balanced capital agenda will cater to both the short-term needs of shareholders and the long-term sustainability of shareholder returns.

The ease of securing funding for the growth agenda has also improved markedly. Key to competitiveness and sustainable value creation will be achieving the right mix of capital, which balances near- and long-term liquidity with flexibility and at an optimal cost.

Future demand: electric vehicles and battery minerals

Many of the world economies are introducing measures to reduce the reliance on internal combustion engines. In response, car manufacturers have been shifting their focus to the development of EVs and investing in battery technology. Sales of electric cars are forecast to exceed diesel cars as early as May 2019.

Key metals in the batteries powering these EVs are cobalt, lithium and nickel. Supply of these metals is not expected to meet forecast demand. Increased interest is expected in assets producing fourth generation metals from car manufacturers that are looking to invest in mines to source materials for their EVs.

In 2018, we expect to see more deals supported by investment-led strategies to diversify by commodity or region. Some of this activity will be to shape portfolios for future growth and sustain shareholder returns.

M&A outlook

With stronger balance sheets across the sector, miners are increasingly returning to an investment-led strategy, which is driving a renewed focus on building portfolios that deliver sustainable shareholder returns.

  • The key drivers for 2018 will be pipeline replenishment, synergistic volume growth and next-generation mineral demand.
  • With the buzz around new world critical minerals and battery technology, deals in lithium, copper and cobalt are expected to feature high on the agenda of management teams across the industry.
  • Activist investors, meanwhile, will continue to shape miners’ strategies, affecting the choice of commodity portfolio and volume of ambitions.
  • Continued pressure to reduce the reliance on fossil fuels will lead to further divestments or spin-offs.
  • In China, having seen the completion of large-scale steel mergers, similar merger activity in coal is also expected as the country starts to target raw materials in its environmental initiatives.

Capital raising outlook

As focus shifts from debt reduction to creating shareholder value, companies’ lending requirements will adjust. Increasing productivity as demand for metals improves will mean more working capital requirements for many companies, while others may refinance high-cost facilities negotiated during the distress period.

The expected return to investment across the sector will be the major driver of new bond issuance in the near term.

In 2018, we expect stronger demand for financing and flexibility to remain important as the sector seeks to maintain a balanced and efficient capital structure.
Hopewell Mauwa
EY Global Mining & Metals Transactions

The expected stabilization of the commodity pricing environment should fuel more equity listings across a number of commodities.

Rising demand for battery technology metals should drive fund-raising for project expansions in 2018, especially for development assets entering into production.

Summary

A smart mix of M&A and capital raising can set companies on the path to growth. 

About this article

Authors

Lee Downham

EY Global Mining & Metals Transaction Advisory Leader

Advising on transactions for EY Mining and Metals clients since 2004. Focused on buy-side and sell-side due diligence and public market listings.

Andrew van Dinter

EY Global Mining and Metals Tax Leader

Trusted tax advisor focused on the mining and metals industry. Corporate strategist with experience across the globe. Team leader passionate about developing a business understanding.