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PERTH (miningweekly.com) – Global merger and acquisition (M&A) deal value in the mining and metals sector fell by 45% during the first quarter of 2016, to $3.3-billion, compared with the previous corresponding period.
Advisory firm EY revealed in its latest global capital raising and M&A report on Monday that global deal volumes during the same period experienced a similar downward trend, with only 72 deals struck in the first quarter of the year, compared with the 90 struck in the last quarter of 2015.
Gold deals comprised over half of the quarter’s deal value globally at $1.7-billion and 46% of the volume at 31 deals.
Divestment processes from a number of diversified miners started to close out and accounted for the top three deals of the first quarter in 2016.
In Australia, the overall value of the capital raising in the mining and metals sector fell by 58% on the previous corresponding period, to $931-million, while deal volumes remained at near record low levels, with just 17 deals reported in the quarter.
The overall value of M&A deals in Australia reached $1.4-billion during the first quarter, with two transactions accounting for all but 3% of the total deal value.
“Financial distress, particularly in the US coal industry, continues to weigh on many companies across the mining and metals industry and it’s playing out in the form of portfolio realignment and divestments to raise capital,” said EY Oceania mining and metals transaction leader Paul Murphy.
“Cash and sustaining costs continue to be the focus for most players in the sector, and while well capitalised miners will continue to consider acquisition opportunities, we are now starting to see the much anticipated foray of private capital into the sector.”
Murphy noted that private capital activity was a lead indicator for growing deal activity, adding that if private investors were seeing value it was a sign that the deal cycle would begin to pick up.
He added that the tough market and increasing interest by financial investors had put a sharp focus on the level of preparation by sellers.
“Sellers must be able to tell a credible and compelling value story to attract and retain buyer interest, they need to prepare more and sharpen their sales skills if they want to secure a deal and secure the best outcome for shareholders.”
The report noted that over one-third of executives, or 36%, saw a lack of fully developed diligence materials as the main cause of value erosion in corporate divestments. When it came to factors that induce private equity buyers to reduce offer prices or drop out of bidding, 44% of executives cited lack of confidence in information.
Murphy said that divestment programmes in Australia and globally would pick up over the coming months, with the need to reduce leverage and make difficult decisions to withstand ongoing volatility.
“We are also seeing increasing interest in the ‘tech’ metals sector – copper, cobalt, graphite, lithium and vanadium – driven by anticipated demand for inputs into electric motors and battery storage.”
EY expected companies to retain their core, low-quartile asset, unless there was a commodity or regional restructure. The advisory firm was also expecting to see companies looking outside of their existing commodity focus or leveraging existing operations to explore other opportunities.