JOHANNESBURG (miningweekly.com) – Mining companies had adapted to the turbulent global economic situation by reducing debt and building strong cash-positive balance sheets to weather the volatile market conditions of 2012, Ernst & Young (E&Y) transaction advisory services Africa director Adrian Macartney said on Thursday.

The E&Y ‘Global Capital Confidence Barometer’ survey found that among the 75 executives polled in the mining and metals sector, there was an increased appetite for mergers and acquisitions (M&As), when compared with other sectors of the global economy.

“Currently, 79% of mining and metals executives buck the global trend by seeking to maintain or increase gearing levels in the next year. While we are not expecting gearing to return to 2007 levels, the results show that some companies have an appetite to increase debt levels as they seek to grow their enterprises, either organically or through M&As,” Macartney said.

Mining and metals executives remained bullish with regard to finding and closing good deals, while 49% of them indicated that cash would be the primary means of financing deals. When asked if their companies expected to make acquisitions in the coming year, 41% of the executives said yes.

Macartney pointed out that mining houses were looking for ‘balance sheet agility’, as executives still looked at refinancing options to get out of restrictive covenants and reduce debt, in order to take advantage of emerging opportunities in the current market.

India and China had been observed investing heavily in bulk commodities such as coal and iron-ore in southern Africa, to supply their burgeoning middle-class populations with consumer commodities. This was reflected in E&Y’s ‘Third-quarter M&A and capital raising in mining and metals’ survey, which pointed to the Asia Pacific region spending about $46.3-billion on acquiring assets across the globe between July and the end of September.

However, a global trend is that the strong price for commodities did not reflect equity valuations of mining projects. This was particularly true for gold companies, where the gold price increased by about 25% this year, on top of a 30% gain in 2010, and the surge was not detectible in gold companies’ equity valuations.

The market uncertainty had resulted in mining and metals executives undertaking more due diligence studies than ever before.

Further, Macartney pointed to extreme volatility and uncertainty in the current world markets that is resulting in the cooling of commodity prices, as the eurozone sovereign debt crisis is deepening and taking its toll on the world economy. Even the strong growth of the emerging economies, especially the Brazil, Russia, India, China and South Africa (Brics) grouping, which underpinned world growth levels during the year, was starting to lose traction, as Brazil, India and China reported slower economic growth.

This impacted on platinum-group metals, steel and thermal coal prices as demand for automobiles and other commodities dropped.

However, the sector is bound to see a turnaround to prerecession price and demand levels, as there had been no significant new bulk commodity discoveries in the last 20 years, while demand for raw materials would grow exponentially in the next 20 years. “Commodity prices will certainly increase significantly as demand from developing economies rises and finite resources are depleted,” he said.
 

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