EY’s report, A new normal, or the bottom of the cycle? Mergers, acquisitions and capital raising in mining and metals, 2015 trends and 2016 outlook, noted that global deal volume in 2015 sunk by 34% to the lowest level since 2000, with just 358 deals completed.
Global deal value dropped to $US40 billion, not including BHP Billiton’s $8.7 billion demerger of South32.
Gold was the most sought-after commodity, and domestic deals made up more than half of the total.
Interestingly, EY noted it was the first year since its analysis began in 2008 that there wasn’t a Chinese deal of more than $1 billion.
Australian mining deal volume more than halved to 68 transactions, while deal value fell 10% to $4.3 billion, again excluding South32.
Independence Group’s takeover of Sirius Resources was the fifth-largest global mining deal in 2015.
The outlook for 2016
EY noted that the majors, like Anglo American, Glencore, Freeport McMoRan, Barrick Gold and Nyrstar, were announcing divestments with “alarming regularity”
Heavy debt loads, ratings downgrades and increasing financial stress are set to drive an uptick in financial restructuring and portfolio optimization this year, with divestments set to soar.
EY said the valuation gap that had held back deal-making in the past couple of years would start to close and it expects “historically well-run” assets in North America and Australia to be the most sought-after.
EY Oceania Mining & Metals transactions advisory leader Paul Murphy says the coal sector will dominate deal activity in Australia in 2016.
“There are some excellent top tier coal assets in Australia that are likely to change hands this year,” he said.
“Cost-cutting, productivity measures and the benefit of the falling Australian dollar helped delay decisions in 2015 but the weight of corporate debt in an environment of commodity price uncertainty will bring people to the table this year.”
The market is already seeing this with Anglo American offloading Dartbrook to Nathan Tinkler’s Australian Pacific Coal and Rio Tinto selling Mt Pleasant to an Indonesian-backed company in the past few weeks alone.
“High-quality Australian coal is well-positioned to fill the growing energy demand in south-east Asia. Those that understand that, and the cyclical nature of the mining sector, are looking at this opportunistically,” Murphy said.
“It is not just resource-specific private equity, but entrepreneurial buyers from outside the sector with an appreciation of future Asian energy demand, who have a close eye on higher quality Australian coal assets.
“Those that understand where Australian coal ranks in the future energy mix and the cyclical nature of the business can pick up some tidy assets at cyclically low prices.”
For those wishing to divest, EY warned that getting the processes right would be paramount to achieving the best possible outcome.
“A company’s positioning on the cost curve is critical in the current market conditions, so presenting robust information to potential buyers is pivotal to provide confidence that cost reduction and productivity measures are sustainable,” Murphy said.
“Similarly, anticipating transaction risks such as separation and regulatory and joint venture approvals take on greater importance in this market.
“Prospective buyers are thin on the ground and they will reduce valuations, or even walk away, if these issues aren’t adequately addressed.”
EY expects more acquisitions by private capital and non-traditional buyers, as well as an increase in spin-offs, mergers, joint ventures and even opportunistic hostile takeover bids.
