Mining sector M&A to boom

January  2015  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The global financial crisis and subsequent economic downturn had a dramatic impact on the global mining sector. Exploration activities were curtailed and some of the sector’s more junior participants were also badly affected. However, industry travails may soon be a thing of the past according to a new report from Grant Thornton International.

In terms of M&A activity, the last few years have been disappointing for many within the mining industry. 2013 in particular was a particularly slow year for transactions. According to the report, ‘Gathering Momentum’, which surveyed more than 250 senior mining executives worldwide, deal volumes in 2013 failed to breach the $90bn mark. Q1 2014 also saw negligible M&A activity in the sector. Although deal volumes throughout the rest of 2014 are believed to have improved, the real growth in M&A activity in the mining space is expected to occur in 2015. Despite the industry’s struggles, the mining sector remains an attractive investment for many firms. Those surveyed in the report believe that 2015 will see the value of M&A deals double compared to 2013.

The firms most likely to be targeted by acquirers, according to the report’s data, are mining companies with high-potential commodities and those facing severe financial difficulty. Given the prevalent economic conditions within the mining industry, firms experiencing hardship, as well as those with underutilised assets, may have little choice but to accept any offers which come their way. Some of the sector’s more attractive and financially secure targets, by contrast, are likely to resist potential acquisition attempts. Either way, the fact that stalled assets and firms in financial jeopardy permeate the mining sector presents acquirers with attractive, available and affordable opportunities. Some of the industry’s larger players are expected to make acquisitions going forward, though not all will be active.

Jeremy Jagt, mining industry leader for Grant Thornton LLP in Canada, said “The mining sector is ripe for a resurgence in M&A activity. We’ve started to see elements of this emerge already, for example BHP Billiton’s announcement that it will spin off assets. 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 metals market.”

The private equity industry is likely to play a significant role in the resurgence of M&A activity in the mining space. PE funds have recently set about raising significant amounts of capital in order to target firms in the mining industry. “What we’re also seeing in the market, adding to this demand, is the return of private equity interest. Funds have now raised large volumes of capital – around $8bn – and they are looking for investment opportunities in mining,” said Mr Jagt. Though the mining sector has previously been considered too volatile for conventional investment firms, attitudes are beginning to change. Historically low valuations in particular have been a catalyst for PE interest.

Despite the optimism, there are still a number of challenges. For junior mining companies in particular, the outlook for 2015 appears difficult. Market conditions for juniors have been poor since 2010 and it would appear that many expect 2015 to be a particularly tough year. According to those surveyed, one in 10 junior miners are expected to enter administration in 2015 and a further 16 percent of firms are likely to halt operations temporarily. A third of those surveyed said that they were considering a merger offer.

For those firms fighting to keep their head above water, the predicted uptick in M&A activity may come too late to make a difference. As a result of the challenges faced by firms, approximately a third of all junior miners will be required to raise additional funds within the first six months of 2015 in order to survive. Thirty-five percent of major or other miners anticipate a need to change their capital structure within 12 months. Furthermore, the survey notes that around a quarter of major or other miners anticipate further challenges with their debt-to-equity ratio to financial covenants within 12 months.

The mining industry has endured a difficult few years. Many firms within the sector have been forced to file for bankruptcy protection and many more businesses are locked in a struggle to keep operating. However, optimism is finally beginning to return to the sector. With an abundance of M&A targets and ready access to capital in the mining space, it is important that both acquiring and selling firms make the most of the improving climate.

© Financier Worldwide

BY

Richard Summerfield