According to Ernst & Young South Africa (EY,) a steady improvement in global market conditions should see a gradual return to deal-making in the mining and metals sector in 2014, following a seven-year low in global Merger and Acquisitions (M&A) volumes in 2013.
Today (03 February 2014) EY released a report on mergers, acquisitions and capital-raising in mining and metals. The report shows the 2013 trends, a 2014 outlook, and shows the deal inertia apparent in the sector last year.
Excluding the all share merger of Xstrata and Glencore, deal volumes and value were down 25% and 16% year-on-year to 702 and US$87.3bn respectively. Africa-focused deals made up 3% of global deal value, a decrease of 16% in deal value and 2% in deal volume year-on-year. This represented US$3.2bn across the continent, with South Africa accounting for US$1.6bn of deal activity.
Sandile Hlophe, Head of Transaction Advisory Services for EY Africa says, “In the context of emerging markets, activity slowed during 2013, with the value of deals targeting Latin America and Africa dropping 80% and 85% year-on-year, respectively. This trend has been consistent in most emerging markets mainly due to majors seeking to repatriate capital to the mature market headquarters. This will help to optimise capital and strengthen their balance sheets for expansion when the market turns and investor confidence returns.”
Globally, capital-raising followed a similar trend, with a 9% decrease in the total volume of issues to the lowest level seen since the 2008 global financial crisis, and a 9% increase in total proceeds to US$272bn – largely due to some exceptional loan refinancing. From an Africa perspective, capital-raising proceeds dropped by 54%, while deal volumes remained relatively flat with a total of 11 deals for 2013.
EY Global Mining & Metals Transactions Leader, Lee Downham, says the third quarter of 2013 is widely seen as the bottom of the market.
“The extreme price volatility and rapid changes to the global economy in 2012 and into 2013, combined with large impairments and senior management changes across the sector, meant the risks in doing deals in 2013 were just too great given the moving base on which decisions needed to be made,” says Downham, “Although there were successful divestments, there is also strong evidence that price volatility continued to create a price expectation gap between buyers and sellers.”
Downham and Hlophe both agree the foundations have been laid for a gradual return to M&A in 2014. “Confidence in the global economy continues to improve, larger companies have stronger balance sheets, and the focus on productivity and efficiency should begin to yield margin improvements. This should provide a better environment for both deal making and capital-raising,” says Downham.
EY expects to see a greater proportion of the sector’s funding to come from equity through follow-on raisings during 2014 and a stronger appetite from debt providers improving access to leveraged loans for quality mid-tier miners and developers.
“Risk capital for juniors is unlikely to be available on any large scale in 2014. While the best development projects will continue to attract funding from the increasing pool of private equity capital, it may take a longer period of sustained commodity prices and cost control discipline across the sector before we see strong investor confidence and IPO markets open for juniors,” says Downham.
Hlophe concludes, “However in emerging markets, especially in Africa we have seen increased financial investor interest in the sector, thus we are likely to see a big focus on juniors by financial investors looking to build up sizeable resources platforms for exit to the strategic majors in five to seven years’ time when the market turns and the majors embark on acquisitive expansion.”
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services are used to help build trust and confidence in the capital markets and in economies the world over. In 2008, EY intergrated 87 countries into one area from across Europe, Middle East, India and Africa (EMEIA). The firm then launched its Africa Business Center™ (ABC), which aims to enhance the effective and efficient links between its geographic reach and areas of expertiseEY represents 33 countries across Africa.