PERTH (miningweekly.com) – Merger and acquisition (M&A) activity in Australia would be dominated by smaller size deals this year, as well as joint ventures to access funding for infrastructure development and divestments of noncore or higher risk assets, advisory firm Ernst & Young (E&Y) said on Monday.

In its latest global ‘Mining and Metals Sector Transaction’ report, E&Y noted that there would be fewer inbound deals during 2012, as opportunities for better quality midtier assets had been largely bought over the past few years.

The larger M&A deals could also be hindered by regulatory requirements supporting national interest, the report stated.

Infrastructure development and noncore divestments will be key drivers of mining and metals sector M&A in Australia in 2012, Australia and Asia-Pacific transactions leader Paul Murphy said.

“We will continue to see brisk activity in infrastructure development this year as companies race to bring production on line and product to market,” Murphy said.

“There are probably fewer than ten potential $1-billion-plus deals that could happen in the Australian market this year, as opportunities for better quality midtier assets have largely been picked off over the past couple of years.”

E&Y’s report showed that during 2011, the number of Australian deals dropped 17% on 2010 to 242, while total deal value jumped 64% to $38.6-billion.

However, mining giant BHP Billiton’s two shale gas and oil acquisitions in the US accounted for 43% of total value. When those two deals were removed, total deal value for the year is a far more modest $22.1-billion.

“While uncertainty and volatility is likely to continue to play out on the world stage, the appetite by management and investors for growth is again likely to provide sufficient stimulus for strong M&A activity in Australia in 2012,” said Murphy.

“Overall, commodity prices in 2011 were up on 2010, driving an improvement in earnings and cash positions. Many companies are faced with the challenging but favourable decision of how best to use their capital – the dilemma of buy, build or return is back on many boardroom tables.”

Inbound investment in Australia in 2011 came primarily from the US, China and Canada with coal deals dominating. The total value of inbound coal deals dwarfed that of any other commodity, reaching $11.3-billion compared with the $8.2-billion for all other commodities combined.

Both domestic and international players invested in the coal sector, with the domestic activity driven by smaller mining companies looking to consolidate balance sheets in order to develop assets, or to become attractive acquisition targets.

Chinese investment in Australia in 2011 came largely through strategic minority equity stakes in junior ASX-listed companies with assets in frontier market hot spots in parts of Africa and Asia.

“This is part of a global trend that will likely continue this year,” said Murphy on Monday.

In addition, if the ban on Australian uranium exports to India is lifted as expected, it could trigger acquisition activity by Indian investors in early stage uranium players that have found it difficult to raise equity funding or debt financing from banks, E&Y predicted.

LISTINGS

Despite the volatility in equity markets, there was still investor support for a healthy number of small-scale junior initial public offerings (IPOs) in 2011, with the ASX hosting the highest share of mining and metals listings globally by volume (44%), but with average proceeds just $7.7-million across 64 IPOs.

“Although there is a strong pipeline of potential IPOs, equity markets are expected to remain volatile so we do not see any major increase in IPO activity this year. However, the smaller $5-million to $10-million IPO market here remains fairly robust and will remain an important source of capital for small resource companies,” said Murphy.

“The availability of seed capital in markets such as the ASX and TSX, and the depth of experienced mining teams to develop mine projects, has been conducive to growth in seeding exploration companies to develop earlier stage projects in higher-risk frontier geographies. These companies in turn lay the foundations for future investment by the midtiers, a stand out trend of 2011.”

He noted that in 2012, E&Y also expected Australia to be a prominent market for IPOs, with a strong pipeline of inbound and domestic listings.

Murphy added that market conditions would dictate the timing and size of offerings.

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