Mining M&A set to double in 2015

EVEN without a potential Glencore-Rio Tinto mega-merger, mining merger and acquisition activity is set to soar next year, according to a new report.
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Kristie Batten

According to Grant Thornton International, the “near-perfect alignment of factors” will herald a new era in mining M&A in 2015 after a slow 2013-14.

Last year, deal volumes failed to break through $US90 billion, but Grant Thornton expected next year’s volumes to double on 2013 numbers.

Grant Thornton UK mining leader Chris Smith said the mining sector was ripe for a resurgence in M&A activity.

“We’ve started to see elements of this emerge already, for example Glencore’s approach for Rio Tinto and BHP Billiton’s announcement that it will spin off assets,” he said.

“Executives at mining companies are telling us that they are in the market to make acquisitions and a near-equal proportion say they will sell their mining company, or parts of it, this year.

“So there is plenty of opportunity for doing deals, especially for those looking to seize opportunities with distressed sellers ahead of any improvement in the commodities market.”

Grant Thornton surveyed more than 250 senior mining executives globally and 32% of respondents from major miners said their company was likely to make an acquisition and 27% believed their company would either be sold or undergo a partial sale.

Of the juniors, 35% expected to make an acquisition, while 36% expected to be sold or partially sold.

However, Grant Thornton expects 10% of juniors to enter administration next year and 59% interviewed need to raise money in the next 12 months.

“It’s an untenable situation for many mining companies,” Smith said.

“When junior miners don’t hold funds to support operations, they enter a capital ‘Catch 22’ – weakened so they can’t sustain operations to generate cashflow and unable to source affordable funding.”

But it’s not only juniors which face difficulties with 25% of majors expected to experience challenges with financial covenants.

Grant Thornton said the market could expect a high number of distressed assets and low valuations.

“Arguably the conditions that will drive M&A activity wouldn’t have come about without the correction of the past four years,” Smith said.

“But, just like a planetary alignment these conditions won’t last forever.

“Buyers and sellers will need to take consideration of issues such as valuations and be prepared to execute strategies decisively.”

On a brighter note, Grant Thornton is expecting a big increase in private equity interest.

“Funds have now raised large volumes of capital – around $8 billion –and they are looking for investment opportunities in mining,” Smith said.

“If these appetites persist the value of transactions for next year, in 2015, will be double that achieved in 2013.

“There is already a good deal of momentum and we believe that the value of transactions this year could increase by 75%, and that’s without any mega-deals from Glencore."