PERTH (miningweekly.com) – The Australian gold sector was likely to remain the hub for merger and acquisition (M&A) activity for the remainder of the year, advisory firm EY reported on Monday, as the sector continued to consolidate.

EY’s latest quarterly mining deals analysis, ‘Mergers, acquisitions and capital raising in mining and metals H1 2015’, indicated that both deal value and volume in Australia were down during the first half of the year, reflecting investor caution and the lack of capital available to junior and midtier miners.

In Australia, there were just 14 deals in the second quarter of 2015, with total deal value of $81-million, excluding the $8.7-billion demerger of South32 from mining major BHP Billiton. This was down 19% and 35% on the previous quarter by volume and value respectively.

EY Oceania mining & metals transactions leader Paul Murphy pointed out that, globally, there was a 2% increase in quarter-on-quarter deal volume to 86 deals and a 13% increase in total deal value to $21.4-billion, excluding the South32 demerger.

However, for the half-year, deal values were 30% lower than in the same period of 2014, dropping to $12.7-billion, while deal volumes were down by 43%, to 170.

EY noted that nearly 80% of the deals undertaken during the first half of the year were valued at less than $50-million and comprised a mere 5% of the deal value for the year so far, reflecting the continued distress at the junior-end of the market and some bargain hunting on low valuations.
 
Capital raising for the first half of the year was notable for a marked increase in follow-on equity raisings, bond issues and convertible bonds, in stark contrast to the stagnant initial public offering market.

The largest share of unrated and junior issues in the first half of 2015 occurred at the sub-$1-million, with 42% of all follow-on funding rights issues globally on the ASX, with proceeds earmarked for general corporate purposes, working capital and small amounts for mining exploration.

“Unlike the smaller-end of the market, the majors are typically in a position where they can raise funds and can do so at relatively low cost if the need arises,” said Murphy.

“However, competition for capital is fiercer than it has ever been, with junior and midtier miners grappling with the challenge of risk-averse equity markets and highly selective lenders.”

Not surprisingly, the EY analysis indicated that access to capital is regarded as a top three business risk for the sector and the number one risk for junior and midtier miners.

Murphy noted that market conditions in recent years had facilitated the rise of alternative sources of finance, such as streams, royalties, high-yield bonds, prefinance offtake and equity-linked instruments.

“These have provided much-needed capital but come with additional complexity and risks. Poorly considered financing strategies could ultimately be value destructive, so careful evaluation is required no matter how desperate for capital you are,” Murphy cautioned.

He further advised junior and midtier miners to reassess working capital to potentially free up more cash and reexamine goods and services tax fuel rebates and research and development incentives to ensure they are accessing all capital they are entitled to.

“Beyond this, these companies need to make their projects stand out from the competition to attract the eye of countercyclical investors and be transaction-ready for when opportunities arise.”