PERTH (miningweekly.com) - The number of mining and metals transactions, and the value of these transactions were expected to improve in 2013, advisory firm Ernst & Young (E&Y) predicted on Monday.

In its 'Mergers, acquisitions and capital raising in the mining and metals sector' report, E&Y said the recovery would be driven by state-backed and financial investors’ appetite for mergers and acquisitions (M&As), combined with divestments.

The report showed that there were 941 completed deals with a total value of $104-billlion in 2012, down 7% and 36% respectively on 2011. This was the lowest number of deals since 2008 and the smallest by value since 2009, at the height of the financial crisis.

However, E&Y Global Mining & Metals transaction leader Lee Downham said on Monday deal activity would pick up in 2013.

“We will see the continued rise of strategic and financial buyers in the sector throughout this year, motivated by the need to secure long-term sources of mineral supply and the prospect of quick returns respectively.”

Downham noted that traditional M&A and financing had become increasingly marginalised post-financial crisis, as access to capital through debt and equity markets became increasingly constrained.

“Corporates are now focused on cost reduction and recycling capital via divestments, and have been less focused on pure M&A,” he added.

“Our analysis shows that the share of deal value by “nontraditional” acquirers has grown year-on-year to account for 31% of total deal value in 2012, compared with just 21% in 2011. State-backed and financial investors account for 69% and 15% of this proportion respectively.”

Downham said financial investors, which included private capital, investment funds, sovereign wealth and real estate holding companies were typically taking toehold investments of between 10% and 15%, while the increasingly commercially focused, State-backed strategic investors were commonly adopting a larger investment strategy.

Meanwhile, E&Y noted that the capital strike by several mining and metals companies in the face of rising costs and softer prices in 2012 would continue until commodity prices recovered sufficiently to encourage new investment.

“The renewed focus by miners on cost savings and capital optimisation will also see continued divestment of noncore or underperforming assets that began in late 2012,” Downham said.

“Leaner business models and stronger balance sheets will emerge during the second half of this year. We anticipate that companies will look to refocus on growth in late 2013 as the pressure to replace depleting reserves and maintain production mounts.”

He added that the expected shift back to growth would likely be through M&A rather than organic growth, with lower valuations and large cost overruns likely to swing the pendulum back to buy over build.

Downham said long-term demand for the sector would continue to be driven by China, other Brazil, Russia, India and China, or Bric, countries and developing nations.

“The rapid cut-back of expansion and capital spending by many organisations is expected to slow long-term supply and prolong a “super-cycle” scarcity premium. Consequently, those with access to capital and a long-term view will seek to invest.”

2012 CAPITAL RAISINGS

E&Y also reported on Monday that there was an overall decline in the amount of capital raised by the sector, the first year since 2009, despite an all-time record $113-billion raised from corporate bonds, 35% more than in 2011.

During 2012, economic uncertainty created volatility and risk aversion among investors, limiting capital-raising options for midtier and junior mining and metals companies, but generating unique opportunities for the sector’s relative safe havens – the investment-grade producers.

Loan proceeds for the year fell to $106-billion as banks continued to reduce their exposure to riskier assets to manage their reserve capital requirements. Of the loans that were closed in 2012, more than half were an extension of existing facilities, meaning that relatively little new bank debt flowed into the sector, E&Y reported.

The volume of convertible bonds issued increased from 73 in 2011 to 113 in 2012, but with relatively low proceeds, from $2.4-billion in 2011 to $3.5-billion last year.

Meanwhile, the total value of initial public offerings (IPOs) in 2012 was the lowest since at least 2007, with a year-on-year 40% fall in volume and 81% drop in proceeds, even excluding the Glencore float in 2011.

“IPO markets were practically closed on anything other than highly dilutive terms,” said Downham.

Similarly, widespread risk aversion culminated in a 48% reduction in secondary equity proceeds to $26-billion, and a reduction in average proceeds by junior companies to just $4-million, down from $6-million in 2011.

“Equity markets are likely to remain challenging in early 2013 and traditional project debt will continue to be available for only the lowest-risk, highest-quality projects. While we may see increased bond activity among the high-yield issuers; ultimately, the financing game has changed,” Downham added.