Mining M&A to continue unabated this year, says EY

6th February 2017 By: Esmarie Swanepoel - Creamer Media Senior Deputy Editor: Australasia

Mining M&A to continue unabated this year, says EY

PERTH (miningweekly.com) – Advisory firm EY expects merger and acquisition (M&A) activities in the mining sector to continue unabated this year, as the continued consolidation of commodity prices positively impacts on the sector and strengthens investor confidence.

In its latest report, EY noted that the supply of assets into M&A will continue to be the result of portfolio realignment owing to changes in strategy, as well as continuing financial restructuring. However, EY expects this to be less intense than in 2016.

Demand for assets will be a driver of market activity, with management teams looking for growth through synergistic acquisitions and potential diversification, in both commodity and region.

“Finally, we will see an increase in deals focused on consolidation and production growth, most likely in the gold sector, and also across base metals and platinum-group metals (PGM).

“We expect an interesting year ahead, with many different strategies being put into action, and a cautious return to dealmaking and capital raising. Volatility is not going away, and there is certainly the potential for more global economic shocks. So this means it’s also the time to lay foundations for sustainable growth, engender resilience to further economic shocks and drive future shareholder returns,” said EY global mining and metals transaction leader Lee Downham.

He noted that, for miners, now more than ever is the time to continue focusing on portfolio optimisation and achieving a balanced capital agenda.

“Making sure you have the best assets in your arsenal will be critical in a changing macroeconomic environment. This means rigorously and regularly evaluating each asset individually for how they sit within the portfolio and wider company strategy. It may mean selling assets in the short term, or as the case may be, acquiring strong performing, strategically aligned assets for future growth.

“Being disciplined about this will also ensure that poor decisions in the deployment of limited capital are avoided.”

Downham noted that securing the optimal financing balance will also be key to growing businesses and successfully executing strategies.

“As debt and equity markets return to favour, companies will need to consider the challenge of packaging these traditional sources of finance with the newer alternatives we have seen in recent years.

“Achieving the right mix of capital will be crucial for securing the success of projects and ultimately the capacity to return value to shareholders in the longer term.”

Meanwhile, EY reported that, while the volume of M&A deals had increased by 33%, from a low base, in 2015 to 477 deals in 2016, the year-on-year deal value dropped by 9% to $44.3-billion, the lowest levels since 2004.

“Persistent volatility made executing deals incredibly difficult, as did the ever-changing macroeconomic environment; it was a tough year to get deals done and this is reflected in the nature of transactions executed,” Downham said.

“Strategic restructuring and sovereign security drove some of the major deals through choppy waters. This resulted in a marked increase in high-value transactions in the last quarter of the year, including the completion of Alcoa’s Arconic spin-off and Freeport-McMoRan’s sale of its Tenke Fungurume mine, which, when combined, had a deal value of $6-billion, representing 14% of the total for the year.”