Mergers and acquisitions activity in the global metals and
mining sector should pick up this year after a slow and patchy
period in 2012, consultancy and accountancy firm Ernst & Young
said Monday.
The global metals and mining sector completed 941 deals worth
$104 billion in 2012, down 7% in terms of volume and 36% in terms
of value from 2011. This was the lowest number of deals since 2008
and the smallest value since 2009, at the height of the financial
crisis, said Ernst & Young in its annual report about M&A
and financing in the metals and mining sectors.
"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,"
said Lee Downham, Ernst & Young's global mining and metals
transactions leader.
Mr. Downham added that miners are cutting back their capital
spending plans in response to concerns about the global economy.
Such cutbacks will result in slower production capacity expansion,
which should in turn prolong the "super-cycle" commodities demand
cycle. As a result, those with access to capital and a long-term
view are likely to look to invest again in new production
capacity.
At the moment, he said the M&A market favors buyers given
the difficulties faced by junior and mid-size mining and metals
companies when raising capital. Nevertheless, "I don't think there
is a huge willingness to sell" given a mismatch between buyer and
seller's expectations on valuation.
Mr. Downham noted that traditional M&A and financing has
been marginalized following the financial crisis of 2008-09 due to
constrained access to debt and equity markets, resulting in a great
proportion of deals being executed by "non-traditional"
acquirers.
Non-traditional acquirers including private equity groups,
investment funds, sovereign wealth funds and real-estate holding
companies accounted for 31% of the total deal value in 2012
compared with 21% in 2011. State-backed and financial investors
account for 69% and 15% of this proportion respectively, E&Y
added.
Mr. Downham said these investors are typically seeking "toehold"
investments of 10% to 15% while the increasingly commercially
focused state-backed strategic investors or state-owned enterprises
are adopting larger investment strategies, as evidenced by the
Qatar sovereign wealth fund's push into natural resources.
In terms of financing, the total amount of capital raised by the
mining and metals sector from debt, equity, and loans fell for the
first time since 2009. The amount of capital raised dropped 27% on
the year to $249 billion.
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 who took advantage of cheap interest
rates to refinance their balance sheets. As a result, capital
raised from corporate bonds hit a record $112.5 billion, up 34%
from 2011.
Loan proceeds, however, fell 43% to $106 billion 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, E&Y said.
On the equity capital raising side, the initial public offering
activity fell to its lowest level since 2007, dropping 40% in
volume and 81% in proceeds even after excluding the massive
Glencore International PLC (GLEN.LN) float in 2011. The amount of
capital raised via IPOs fell 92% to $1.39 billion in 2012 compared
with $17.45 billion the previous year, when the Glencore IPO took
place.
Mr. Downham said he expects mining and metals companies to look
at both debt and equity to finance their activities in 2013, with
equity raising likely to come from private placements or stake
sales rather than public listings. He also noted that companies are
likely to pursue alternative ways of raising capital through
non-conventional issuances or royalty-type agreements rather than
corporate bonds.
Mr. Downham said he expects a pickup in the IPO market in the
second half and into 2014 as valuations improve.
Write to Alex MacDonald at alex.macdonald@dowjones.com
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