Mining value creation set to rebound for the first time in five years
London, 8 November 2017
- Debt/EBITDA on course to fall to five-year low among leading mining companies
- Debt-to-equity ratio falls to 32% for top 50 mining companies surveyed
- Deal value up 68% year-on-year as shift to growth gains momentum
Mining companies’ economic value creation is set to rebound in 2017 after consistent erosion since 2011, according to the second report of a new EY two-part series, Does cutting debt have to mean reducing your ambitions? Debt reduction and relentless cost-cutting remains high on the agenda, however, as the mining and metals sector seeks to create shareholder value through margin improvement and lowering financial risk in the wake of 2016’s uptick in commodity prices.
The report analyzes the world’s top 50 mining companies by market capitalization and reveals that debt fell by around 15% year-on-year in the first half of 2017. If this trajectory continues, debt/EBITDA could be set to fall below 1.0 for the first time in five years according to the report. The survey findings also highlight a continued shift in capital structure for the mining and metals sector, with gearing1 dropping to 32% at the end of the first half of 2017 – two percentage points lower than that at the start of the year.
Lee Downham, EY Global Mining & Metals Transactions Leader, says:
“The trend toward continued debt reduction and shareholder returns reflects a persistently cautious mindset across the mining and metals sector. But the return to growth is now offering flexibility to apply other levers to create value, such as production growth, restructuring of portfolios and better cash allocation to improve valuation multiples.
“A balanced approach to capital allocation, which not only considers the need to return cash to shareholders but also the need to grow, is necessary to enhance shareholder value creation. Many players will now be assessing the efficiency of their capital structure given its implications on the overall cost of capital and shareholder value creation.”
Continuing change in capital structure is supported by the latest EY Mergers, acquisitions and capital raising in mining and metals: 3Q17 trends and 2017 outlook, which indicates that appetite to raise more capital in the sector is expected to increase as the switch to growth gains momentum.
According to the report, global aggregate capital raised increased by 8% year-on-year to US$66b in 3Q17, with China’s share increasing to 41% of the capital raised from 25% in the previous quarter. There also was an increase in activity in equity markets in 3Q17, with follow-on equity more than doubling quarter-on-quarter to US$12.5b, up 66% year-on-year.
M&A activity showed similar signs of improvement, marked by some evidence of a shift from largely divestment-led drivers to strategic-led deals focused on growth.
Despite a fall in deal value of 42% in 3Q17 quarter-on-quarter to US$9.4b, deal value over the first nine months increased by 68% year-on-year. Chinese activity increased to 37% of deal value in 3Q17, up from 20% in 2Q17, and deals targeting established mining regions in Australia and North America comprised 60% of the volume of deals undertaken in 3Q17.
Downham concludes: “Deal activity appears to be increasing, as investor concerns shift away from financial risk and begin to focus on how companies create long-term value creation. We anticipate that consolidation deals will be fueled by the availability of capital and a growing threat of intervention from activist investors. The focus on lowering financial risk should also ease going forward, with activity in debt markets picking up once again.”
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How EY’s Global Mining & Metals Network can help your business
The sector is returning to growth, but mining and metals (M&M) companies face a transformed competitive and operating landscape. The need to improve shareholder returns will drive bold strategies to accelerate productivity, improve margins and better allocate capital to achieve long-term growth. Digital innovation will be a key enabler but the industry must overcome a poor track record of technology implementations. If M&M companies are to survive and thrive in a new energy world, they must embrace digital to optimize productivity from market to mine.
EY takes a whole-of-value-chain approach to support each client to help seize the potential of digital to fast-track productivity, balance portfolios and set a clear road map for their new energy future.
For more information, please visit ey.com/miningmetals.
About EY’s Does cutting debt have to mean reducing your ambitions?
The analysis in Does cutting debt have to mean reducing your ambitions? isbased on the top 50 mining companies in the world by market capitalization as of 30 June 2017. This excludes aluminium and steel companies, and backward-integrated metals producers with significant mining assets. The analysis is based on aggregated financial statements data from Capital IQ. For consistency, calendar years have been used across all companies. The definitions and treatment of the financial data are as per Capital IQ and may differ from other information sources. However, in this analysis, the overall trends are more important than the absolute numbers and any interpretation should be treated as such.
About EY’s Mergers, acquisitions and capital raising in mining and metals: 3Q17 trends and 2017 outlook
All mergers and acquisitions data, and capital raising data was extracted from Thomson ONE and analyzed by EY. Only completed deals are included in the data and analysis.
1Ratio of net debt to equity