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Mining and metals M&A deal values down 45% in first quarter

1st July 2016

By: Ilan Solomons

Creamer Media Staff Writer

  

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Global mining and metals transaction activity in the first quarter of 2016 confirms the harsh reality faced by mining companies across the industry is far from over.

This is according to professional services firm EY’s latest quarterly analysis, which reports that deal values fell 45% year-on-year to $3.3-billion in the first quarter of 2016, compared with $5.9-billion during the same period in 2015.

The report entitled ‘Divestments: extracting hidden value’, confirms the five-year downward trend in transaction activity failed to subside in the first quarter of 2016.

Global deal volume followed the same downward trend with 72 deals being recorded during the first quarter of 2016, down from 90 deals made in the fourth quarter of 2015. Meanwhile, in Africa, deal volumes decreased to three during the first quarter of 2016, compared with seven deals made in the fourth quarter of 2015.

“The decrease in the deal volume in Africa from the fourth quarter of 2015 to the first quarter of 2016 was also accompanied by a significant decrease in deal value,” notes EY mining and metals transactions director Quintin Hobbs.

He adds that, while in the fourth quarter of 2015, the deal value of the seven projects was $557-million, the first quarter of 2016 saw the deal value dropping to just $7-million.

Hobbs further points out that mergers and acquisitions and capital raising activity continued its downward trend, and he is of the view that further adversity may be expected before a significant turnaround in transaction activity occurs.

He remarks that market volatility, wider concerns surrounding US monetary policy and the pace of economic slowdown within China resulted in significantly reduced equity market liquidity. This was in addition to follow-on offerings during the first quarter of 2016 declining by 59% year-on-year and primary listing activity remaining stagnant.

EY global mining and metals transactions leader Lee Downham highlights that prolonged commodity price volatility, widespread financial distress and subdued investment appetite continues to take its toll on transaction activity in the mining and metals industry.

“These forces are not driving the value or volume of deals expected at the outset of the year. Instead, we are seeing greater restraint, as companies wait to see whether we have finally reached the bottom of the market,” he explains.

Downham, moreover, notes that gold deals comprised over half of the first quarter of 2016’s deal value at $1.7-billion, which was also 46% of the volume at 31 deals.

Meanwhile, he points out that divestment processes from a number of diversified miners started to close out and accounted for the top three deals of the first quarter of 2016.

“Those under duress and forced to transact in the current market conditions are examining portfolios and pursuing divestments to raise capital and strengthen balance sheets.

“This is a relatively new approach adopted by the industry after years of consolidation. Companies have to sharpen their sales skills to secure the best outcome for shareholders,” states Downham.

He emphasises that sellers must be able to communicate “a compelling value story” to attract buyers and create competitive tension in the process, particularly when it comes to marginal assets.

Downham points out that, in sub-Saharan Africa, the quarterly analysis indicates that, even though deal volume in countries such as South Africa did not go down from the fourth quarter of 2015 to the first quarter of 2016, the deal value did, in fact, drop substantially from $119-million to $9-million.

Hobbs notes that, even though the number of deals did not grow in South Africa over the period, none of the deals represented investments going out of the country.

“All three deals in the fourth quarter of 2015 were investments into the country, while those that took place in the first quarter of 2016 were domestic investments,” he says.

Additionally, the report finds that more than one-third of executives globally (36%) see a lack of fully developed diligence materials as the main cause of value erosion in corporate divestments.

The report also highlights that, when it came to factors that induced private-equity buyers to reduce their offer prices or drop out of bidding, 44% of executives cited lack of confidence in information as their reason for doing so.

Nonetheless, Downham says EY expects deal activity to pick up over the remainder of 2016, compared with the first quarter.

“Divestments will continue to play an important role in the market as companies make difficult decisions on how best to position operations through continued volatility,” he concludes.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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