Deal inertia reflects global hesitancy

AS global mining and metals deals recede in volume and value, private capital is establishing a more formidable presence in the industry, a recent study indicates.
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Justin Niessner

According to EY’s analysis of third-quarter and year-to-date mergers, acquisitions and capital raising data in the mining industry, a total of 165 deals were completed in Q3 with a value of $US8 billion, versus 185 deals worth $33.3 billion in the previous quarter, when the merger between Glencore International and Xstrata skewed figures above trend.

For the nine months to September, there were 537 deals worth $96.9 billion.

Excluding the $59.5 billion Glencore Xstrata mega deal, this represents a 22% decline in value and a 24% decline in volume on the same nine-month period in 2012.

The report found that a seemingly unbridgeable gap has formed between buyer and seller price expectations, outlining an effect of “deal inertia”, whereby sellers do not need to sell urgently and buyers remain cautious.

Gold remained the most targeted commodity with the total value of deals reaching $9.4 billion for the nine-month period.

This was followed by $9.1 billion in oil and gas deals, $8.4 billion in aluminium and $6.2 billion in copper.

Meanwhile, private capital interest in the sector continued to grow, with financial investors taking an increased share of total deal value – 18% when excluding Glencore Xstrata, compared with 5% in 2012.

“The push by private capital into the mining sector is gathering momentum,” EY global mining and metals transactions leader Lee Downham said.

“While it’s only just beginning to be evident in deal numbers, perhaps more telling are the regular announcements by funds that capital has been secured.

“We will increasingly see the deployment of this capital over the next couple of years.”

Downham said the low-risk and predominantly domestic nature of the deals being done was due to the mining sector remaining introspective and cautious about investing in emerging regions.

“Companies are transacting for synergies and margin to improve the bottom line, rather than growth of the business,” he said.

“It is a very risk-averse transacting environment.”

North America remained the most sough-after region by deal value, with $21.2 billion worth of transactions over the nine-month period, followed by the Asia-Pacific region with $15.6 billion.

EY data tracked subdued capital raising over the three months to September at $39 billion, compared to $78 billion in the previous quarter.

Junior miners, meanwhile, kept focused on cash conservation while the window for mining and metals IPOs remained closed.

“There seems to be an increasing number of capital providers available to the sector, and the different forms of capital have evolved, but capital is still only being attracted to the very best projects,” Downham said.

“It may take a longer period of sustained commodity prices and cost control discipline across the sector before we see wider investor confidence and IPO markets open properly.”