PERTH (miningweekly.com) – The Australian mining industry is back to the merger and acquisition (M&A) levels of ten years ago, with deal volume and value declining amid a global drop off in mining M&A activity.

In Australia, deal value amounted to $4.7-billion in 2014, down from the $5.5-billion achieved in 2013, and the lowest since 2004. Deal volumes also declined for the fourth consecutive year to 144 deals, down from the 178 in 2013 – the lowest since 2003.

EY reported in January that global deal activity declined across the sector in 2014, with the overall value falling by 49% on the 2013 figures, to $44.6-billion. Deal volumes dropped by 23% year-on-year to 544. Only 11 transactions were classified as megadeals during the year, meaning they had a value of over $1-billion.

EY Australia and Asia Pacific mining and metals transactions leader Paul Murphy said that the Australian sector could expect more divestments and forced assets sales in 2015, as well as a pick up in the pace of capital investment.

“Standing still is not an option for the sector. We expect to see mining companies continuing to review their portfolios and capital allocation with regard to growth options,” he commented in a statement.

“As the sector enters the latter stages of a global supply rebalancing and new mining industry participants jockey to stake their position, companies are juggling shorter term financial performance with longer term value drivers to take the necessary capital decisions to optimise value creation.”

EY analysis of capital allocation trends of 30 of the largest listed mining companies globally between 2003 and 2013, showed an underperformance by those companies which invested primarily in a “build” strategy over the time period,  while “returners” outperformed, with “acquirers” not far behind.

“Acquisition options have often been taken off the table because of the significant impairments that have followed deals in recent years, and the stigma attached as a result,” said Murphy.

“This overlooks the huge returns that some acquisitions created earlier in the cycle, and the short payback that a deal, if executed well, may generate overall compared to investing in a portfolio asset. Given the sector is now back to the lowly M&A levels of ten years ago, the question is when to move, as the rule of thumb tells us that the early movers will create the most value.”

EY expects 2015 to be “almost certainly” a turning point for the deployment of private capital in the sector. “On the whole, sector-focused funds have patiently and conscientiously refrained from making significant investments in 2014, and this has proven to be the right strategy, given where share prices across the sector ended the year,” said Murphy.

“Along with depressed equity valuations, the pipeline of quality assets expected to enter the market as a result of portfolio reviews sets the scene for significant industry restructuring and the emergence of some new players to drive competitive growth.”

EY said it also expected to see more strategic joint ventures emerge as a way of sharing the costs and risks associated with accessing new markets, to realise synergies, as well as among Asian acquirers looking to secure supply.

“There could also be a flurry of opportunistic buying as companies fall under the weight of widespread price volatility.”

Globally, total proceeds from capital raising across the sector in 2014 were down 15% on 2013, falling from $272-billion to $230.8-billion. However, most debt raised went into refinancing with little new equity coming into the sector during the year.

Beyond the majors, capital raising for projects remained complex and often required multiple funding sources.

“Capital availability has become very selective and getting projects away requires increasingly sophisticated and innovative funding structures and sources,” said Murphy.

“Some of the more innovative project finance stories in 2014 came from midtier and advanced developers, including the $7.2-billion funding package for Roy Hill iron-ore project in the Pilbara, the year’s largest project finance deal.”

Innovative financing structures and sources seen in 2014 and set to continue in 2015 include financing arrangements with commodity traders and specialist funds involving offtake agreements and streaming and royalty deals.

“For advanced juniors and single-project developers, there are options, but each comes with its own challenges and the markets are particularly difficult right now,” said Murphy.

“As a result, this part of the sector is stuck between a rock and a hard place – poorly considering financing strategies can be value destructive, but with no finance there will inevitably be growth stagnation,” he added.

Murphy said many juniors which had effectively suspended exploration and development activities to conserve cash would simply continue in “survival” mode.

“There are some positive signs. Australia had the highest volume of mining and metals initial public offerings (IPOs) globally in 2014, with seven listings raising $76-million, helped by the buoyancy of the broader IPO market in Australia.

“However, the lack of risk capital for junior explorers is having a significant impact on available funds for exploration, potentially setting up supply shortages for the next decade,” he said.