Cape Town, 3 FEBRUARY 2014 – A steady improvement in global market conditions should see a gradual return to deal-making in the mining and metals sector in 2014, off the back of a seven-year low in global M&A volumes in 2013.
Released today, the EY report Mergers, acquisitions and capital raising in mining and metals: 2013 trends, 2014 outlook, shows the deal inertia evident in the sector last year. Excluding the all share merger of Xstrata and Glencore, deal volumes and value were down 25% and 16% year-on-year to 702 and US$87.3b respectively.
Africa-focused deals made up 3% of global deal value, a decrease of 16% in deal value and 2% in deal volume year-on-year. This represented US$3.2b across the continent, with South Africa accounting for US$1.6b of deal activity.
Sandile Hlophe, Head of Transaction Advisory Services for EY Africa says, “In the context of emerging markets, activity slowed during 2013, with the value of deals targeting Latin America and Africa dropping 80% and 85% y-o-y, respectively. This trend has been consistent in most emerging markets mainly due to majors seeking to repatriate capital to the mature market headquarters. This will help to optimise capital and strengthen their balance sheets for expansion when the market turns and investor confidence returns.”
Globally, capital raising followed a similar trend, with a 9% decrease in the total volume of issues to the lowest level seen since the 2008 global financial crisis, and a 9% increase in total proceeds to US$272b, largely due to some exceptional loan refinancing.
From an Africa perspective, capital raising proceeds dropped by 54%, while deal volumes remained relatively flat with a total of 11 deals for 2013.
EY Global Mining & Metals Transactions Leader Lee Downham says the third quarter of 2013 is widely seen as the bottom of the market.
“The extreme price volatility and rapid changes to the global economy in 2012 and into 2013, combined with large impairments and senior management changes across the sector, meant the risks in doing deals in 2013 were just too great given the moving base on which decisions needed to be made,” says Downham.
“Although there were successful divestments, there is also strong evidence that price volatility continued to create a price expectation gap between buyers and sellers.”
Downham and Hlophe agree the foundations have been laid for a gradual return to M&A in 2014.
“Confidence in the global economy continues to improve, larger companies have stronger balance sheets, and the focus on productivity and efficiency should begin to yield margin improvements. This should provide a better environment for both deal making and capital raising,” says Downham.
Financial investors will be key drivers of M&A
Financial investors and equity-backed alternative capital providers will be particularly active in the M&A market in the first half of 2014, driven by anticipated longer term commodity price recovery and the ability to leverage management ability.
“A number of Private Equity funds have raised resources focused funds and we expect increased deployment of these funds into resources assets in 2014. We estimate these investors have more than US$10b deal capacity for the sector, thus we expect to see some big deals in the sector over the next year,” says Hlophe.
“They will be focused on low risk geographies and looking to leverage under-performing assets, using technical, operational and financial influence to generate better returns.”
This increased appetite follows a year in which financial investors’ share of total deal value in the sector increased from 5% in 2012 to 19% in 2013. In Africa, opportunity for capital investment lies with the juniors, particularly from financial investors.
“This supports the view that 2013 marks the tipping point for the sector, with many of the providers of such capital calling the bottom of the market,” adds Hlophe.
Capital raising outlook
EY expects to see a greater proportion of the sector’s funding to come from equity through follow-on raisings during 2014 and a stronger appetite from debt providers improving access to leveraged loans for quality mid-tier miners and developers.
“Risk capital for juniors is unlikely to be available on any large scale in 2014. While the best development projects will continue to attract funding from the increasing pool of private equity capital, it may take a longer period of sustained commodity prices and cost control discipline across the sector before we see strong investor confidence and IPO markets open for juniors,” says Downham.
Hlophe concludes, “However in emerging markets, especially in Africa we have seen increased financial investor interest in the sector, thus we are likely to see a big focus on juniors by financial investors looking to build up sizeable resources platforms for exit to the strategic majors in five to seven years’ time when the market turns and the majors embark on acquisitive expansion.”
Key numbers: global mining and metals 2013 M&A and capital raising
• 703 deals globally with total deal value of US$124.7b. 70 deals across Africa and deal value US$3.2b.
• Excluding the Xstrata/Glencore merger, 702 deals worth US$87.3b, down 25% and 16% respectively year-on-year.
• Switzerland, UK and Canada top three acquirers of African mining deals for 2013
• Copper and gold were the leading target commodities for inbound deals across Africa
• In South Africa though, coal was the leading target commodity with 49% of deals by value, due to increased demand for energy in South Africa and other emerging markets.
• DRC was the leading Africa country by value of deals at US$430m with South Africa coming in at US$397m