BRIGHTS RAYS OF HOPE Many mining companies will see the conditions as ripe for value accretive moves, with market differentiation their immediate goal
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One of the biggest mergers and acquisitions (M&A) stories of 2016 concerned the assets that did not sell. A number of large deals, expected to be completed by early 2017, were withdrawn from the market, possibly owing to the rebound in commodity prices and the improving prospects of the companies that owned them.
This is according to advisory firm PwC’s ‘Mine 2017’ report, which was released on the sidelines of the Junior Indaba conference, in Johannesburg, earlier this month.
The report analysed 40 of the largest listed mining companies by market capitalisation. The financial information for 2016 covered the reporting periods from April 1, 2015, to December 31, 2016, with each company’s results included for the 12-month financial reporting period that fell into this time- frame.
PwC Africa energy, utilities and mining industry leader Michal Kotzé says that, more broadly, asset sales in 2016, rather than fire sales, were largely strategic.
“Mines, particularly diversified players, sold minority stakes in nonmining businesses,” he states.
China on the March
Further, the report notes that China remains the exception to the dominant investment behaviour within the top 40 mining companies, as, during the downturn, Chinese companies demonstrated “one enormous advantage” over other miners from both traditional and emerging countries, which was its access to capital.
Kotzé comments that, with deeper pockets, Chinese players were able to fund more acquisitions than their counterparts, either confidently buying assets at bullish prices or moving quickly on assets made available at the bottom of the price cycle.
“We also saw an increase in acquisitions by Chinese private- equity firms, and we expect China to continue to be active in acquiring global mining assets as a way to reduce its longer-term dependence on imports,” he points out.
Further, the report highlights that balance sheet clean-ups require discipline, which has resulted in a tailing-off of impairments, the avoidance of any new bankruptcies, the absence of any significant streaming transactions and a general passing of distress.
Kotzé remarks that the market “rightly” applauded this, reinstating a positive gap between market caps and net book values that was absent in 2015. He says that all this provides a platform for decisive action in the future.
The report states that, while many will be willing to ride the waves of industry sentiment, others will see the conditions as ripe for value accretive moves, with market differentiation their immediate goal.
Kotzé contends that action might also come in the form of commitments to greenfield projects, M&A or technology – or a combination of these – while others may realign their strategy in response to external forces such as recycling and substitution, shareholder activism and government intervention.
Digital Impact on Mining?
Meanwhile, he says that there is a question whether the “digital revolution” will become an enduring part of the mining psyche. Kotzé states that new technologies are promising a boost for the sector, such as software to optimise asset utilisation, devices to remotely monitor and control activities and robotics to automate repetitive tasks.
He asserts that the benefits of asset optimisation tools are significant, as, according to PwC’s analysis, it is estimated that maintenance costs can be reduced by between 20% and 40%, asset utilisation increased by up to 20%, and capital expenses reduced by between 5% and 10%, while also delivering improved environmental, health and safety outcomes.
“A number of top 40 miners have announced or implemented digital innovations that are already enhancing performance,” Kotzé highlights.
PwC assurance partner Andries Rossouw adds that mining companies need to combine engineering excellence and know-how with a new open-mindedness to learn from advanced analytics. He says that they also need to embrace robotics and platforms that fundamentally challenge decades of doing things the same way, as he believes that it is as much about behaviour as it is about technology.
“The key question is: Who will act rather than simply react? There will be more advances this year, but how impactful they will be remains to be seen,” Rossouw concludes.