Miners Returning to M&A
Robust demand fundamentals, strong balance sheets and an appetite for growth will drive a step-up in M&A in the global mining and metals sector in 2012, says Ernst & Young’s Global Mining & Metals Transaction Leader, Lee Downham.
Commenting on the release of Ernst & Young’s annual global mining and metals sector transaction report, Recognizing value in volatility, Downham says mining and metals companies are learning to live with uncertainty and are positioned to seize opportunities.
“The global uncertainty and volatility is likely to continue through 2012, but mining and metals companies have an appetite for growth and are increasingly unwilling to stall their growth plans, so it’s likely there will be a return to deal-making in 2012,” says Downham.
“Those who can work with volatility will be the dealmakers in 2012 and there may well be real buying opportunities.”
Ernst & Young’s report shows that total global deal value in 2011 was up 43% to US$162.4 billion (compared to US$113.7 billion in 2010), with megadeals of US$1 billion or more accounting for two thirds of total deal value, primarily driven by strategic domestic consolidation where synergies could be identified.
However, while deal value was up, global deal volume in 2011 was down 10% to 1,008 (compared to 1,123 deals in 2010), with limited capital availability reducing the capacity of smaller players to do deals.
In deal value terms, M&A in 2011 was dominated by developed mining countries, notably the US, Canada and Australia, with consolidation in coal and gold the dominant commodities. Some further domestic consolidation in 2012 is likely.
However Downham says the headline numbers mask the trend back to emerging and frontier mining regions, particularly parts of Africa, South America and Asia, via off-take agreements or minority stakes in ASX or TSX listed companies with assets in these regions.
“We expect the number of deals in those emerging and frontier countries that have high quality resources and friendly foreign investment rules to ramp up this year as risk appetites increase,” he says.
“This shift is primarily due to the diminishing availability of quality mineral deposits in developed mining countries at a reasonable price.”
Financing and capital raising
Turbulent equity markets and the limited availability of bank debt to non-investment grade borrowers forced mining and metals companies to look to alternative funding sources in 2011, a trend that will continue in 2012. Bank loans for the year totaled US$187 billion, about half of which was re-financing.
The major diversified miners and mid-tier companies embraced the corporate bond market in 2011, with a record US$84 billion issued, up 16% on 2010.
In 2010 corporate bonds issued by mining and metals companies were dominated by a handful of very big raisings by the larger companies retiring bank debt and extending debt tenure. In 2011 however, there were more bond issues but for relatively smaller amounts by mid-tier companies, highlighting that this has now become a mainstream funding source for the sector.
“The focus of capital raising in 2011 was not aggressive re-leveraging but clever re-financing. Companies are coming into 2012 with credit rating strength and the capacity to gear up for future growth,” says Downham.
“Mining and metals companies will continue to tap the corporate bond market in 2012 and we also expect to see a further increase in the use of alternate financing sources such as sovereign wealth funds, private wealth and strategic partnerships looking to secure long term off-take arrangements.”
“There is an increasing preparedness to do deals but it is unlikely that bigger deals will be entirely financed by bank debt in the short term. Miners may be returning to deal making but that doesn’t mean banks will be returning to mega deal M&A in 2012.”
Downham says mining and metals companies are increasingly looking at multiple financing options. When evaluating valuations, management are looking to capture the value in long term cash flows and apply risk on a much more sophisticated basis.
“The fitter and faster companies will be best placed to maximize opportunities for growth during 2012.”
Buy, build or return
Downham says equity markets remain very sensitive to macroeconomic news and for many companies, market values do not appear to correlate “with the value under the ground”.
“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 favorable decision of how best to utilize their capital – the dilemma of buy, build or return is back on many boardroom tables.”
Unsurprisingly, overall IPO volume was down in 2011 with global equity markets weighed down by volatility and uncertainty.
In total there were 145 listings in 2011, down 18% from 177 in 2010. Total proceeds from IPOs in 2011 came in at US$17.4 billion, however this drops to US$7.4 billion or 59% below 2010 proceeds when the US$10 billion Glencore IPO is excluded.
“There were still a healthy number of small-scale junior IPOs in Australia and Canada, and that is likely to continue in 2012. Junior companies are often prepared to compromise more on valuation to get a listing and use that as a platform for further capital raising once valuations return.”
Beyond the junior listings, Downham says a record number of IPOs were postponed in 2011 and there is a strong pipeline of companies that will “pounce” when there is a sustained period of confidence and stability in equity markets.
“If markets stabilize this may happen in the second half of 2012.”