The better the question. The better the answer. The better the world works. У вас есть вопрос? У нас есть ответ. Решая сложные задачи бизнеса, мы улучшаем мир. У вас є запитання? У нас є відповідь. Вирішуючи складні завдання бізнесу, ми змінюємо світ на краще. Meilleure la question, meilleure la réponse. Pour un monde meilleur. 問題越好。答案越好。商業世界越美好。 问题越好。答案越好。商业世界越美好。

In a diverging market, what path will you carve?

Mergers, acquisitions and capital raising in mining and metals

1Q17 trends and 2017 outlook

In the first quarter 2017, we have seen the aggregate value of M&A activity remain robust, with China continuing to be a key driver of deal value. Capital raised is down year-on-year, but if we exclude China, values are up year-on-year.

Generally the market is still subdued as participants remain cautious. We expect an interesting year ahead, with many different strategies being put into action, and a cautious return to deal making and capital raising. Economic volatility is not going away, and there is certainly the potential for more global economic shocks.

For miners, now more than ever, making sure that you have the best assets in your arsenal, achieving the right mix of capital and securing optimal financing will be critical for future growth.

M&A trends and outlook

The aggregate value of M&A activity remained robust in 1Q17 primarily driven by China, which accounted for just over two thirds of the US$12.8b transacted over the quarter. While down in absolute levels compared to 4Q16, the value of deals executed is up significantly on the same period in 2016 and 2015, albeit heavily influenced by Chinese activity.

China continues to be a key driver of deal value, with steel and aluminum consolidation driving the bulk of the activity, most significantly the merger of Baosteel with Wuhan Steel to create the country’s largest steel producer. Outside of China, the steel sector also saw activity on the back of Arrium’s sale of its Moly-Cop consumables business to private equity firm, American Industrial Partners.

In the US, activity in the coal sector remains strong, largely driven by the divestment activities of the major producers, whilst consolidation across the gold sector in the Americas more broadly, remains a strategic focus for many of the producers in order to create scale and synergies in a fragmented market.

While there have been a handful of notable deals, such as the announcement of Sibanye’s US$2.5b acquisition of Stillwater Mining, momentum generally remains subdued across the industry, as participants continue to be cautious about global demand growth and concerns over volatility remain.

EY - Mergers and acquisitions - value and volume: 2017-2016

Outlook for 2017

We expect a continued upward trend in the volume of deals during the year ahead, but with a continued absence of the multibillion dollar transformational deals that characterized growth strategies during the super cycle.

Mining companies, in general, have de-levered and are now in better financial health than at any time in the last two to three years. Capital allocation remains key, and with diverging outlooks, we expect M&A drivers to continue to differ by commodity and geographical market. In markets where growth is expected, such as copper and gold, we expect strategic activity to rebound while in weaker markets consolidation and restructuring activity will continue to drive deals.

The lack of exploration spend as a result of limited access to capital, will inevitably contribute to a future supply deficit and may trigger a return to financing across the juniors towards the end of 2017.

Early signs of market bottom will encourage those who’ve successfully strengthened their balance sheets to start considering strategic acquisitions. Mid-tiers will be consolidating their positions through all-equity based transactions, with a view of becoming major players in their respective commodities at the peak of the next cycle.

Capital raising trends and outlook

Global aggregate capital raised fell by 28% to US$47b in 1Q17 compared to the same period in 2016. The major drop was in China were proceeds more than halved from US$35b raised in 1Q16 to US$14b in 1Q17. Excluding China, however, capital raised in the rest of the world increased by 10% year-on-year mainly due to a strong rise in transactions in North America.

EY - trends and outlook

EY - trends and outlook

Outlook for 2017

A return to growth, continued stronger pricing and increased productivity will trigger increased capital spending over the short-to-medium term. The reduction in capex in recent years has left some commodities facing supply deficits, exacerbated by the fact that exploration activity has declined.

This in turn will drive some of the producers to choose to fund smaller players rather than directly engaging in exploration themselves. For those in development, the current strength in the pricing environment will see concerted efforts to timely commission assets. Meanwhile, producing assets will continue to invest in working capital to mirror stronger production activity. All these factors mean miners will return to capital markets to execute their strategies at all stages.

Another looming concern for mining companies is the state of their capital structure. The significant reduction of debt has seen some players heavily equity funded, which is relatively more expensive. Inevitably, we may see participants looking to rebalance their capital structures in order to meet required returns on investment.

The anticipated improvement in credit ratings across the sector, meanwhile, will support increased activity on bond markets ahead of any upgrades. As such, debt markets should become more active. Buoyed by stronger equity prices, IPOs should also start to come to market, though it will be a while before proceeds match the US$18b raised in 2012.


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The data includes completed deals only and is primarily sources from ThomsonONE.