M&A in the global mining and metals sector is likely to remain subdued for the remainder of 2014 despite a strong deal pipeline and a private capital funds war chest yet to be unleashed, according to Ernst & Young (EY) Global Mining & Metals Transactions leader Lee Downham.

EY's quarterly M&A analysis shows 112 deals in the sector during quarter two this year totalling US$9.5 billion. Deal volume was down 21% on the previous quarter and down 41% on the same quarter in 2013. Deal value was up 33% on the previous quarter, primarily due to the US$3.6 billion acquisition of Osisko Mining by Yamana Gold and Agnico Eagle Mines.

First half comparisons show total deal values down 69% year-on-year to US$16.7 billion from US$53.8 billion, the fourth consecutive year of decline. Deal volumes for the first half of 2014 were down 34% to 254, from 386 in the same period of 2013.

Lee Downham says, "Deal making in the sector continues to be cautious, partly due to the continuing commitment to capital discipline, but also due to a lack of urgency over investment given the lack of competition for assets. Some standout deals and hostile bids during Q2, combined with a strong deal pipeline and substantial capital waiting to be deployed by mining-focused funds, suggest that momentum is building. For those brave enough to invest against the cycle there would appear to be good buy-side opportunities."

Major diversifieds are continuing to consider divestments as a way of reducing debt, maximizing returns on capital and optimizing their portfolios, however, stronger balance sheets has taken the urgency out of these deals.

"We do, however think divestments of non-core assets from the majors will pick up pace in the next six months. While these assets may not be strategic to the divesting companies, they are typically high-quality assets and will likely attract strong competition, particularly from private capital buyers," Lee Downham says.

Acquisitions by financial investors accounted for 20% of all mining and metals deal volumes globally in the first half. "The much anticipated influx of substantial capital from new mining-focused private funds is taking longer than expected to hit the market. This is partly driven by the complex nature of executing an investment, which takes time regardless of size, but also the lack of competition in the market for deals, with investors happy to wait for clear signs that we are at the bottom of the market before making billion dollar-plus commitments," he says.

EY estimates that the mining-focused private capital funds have a war chest of at least US$10 billion and possibly as high as US$20 billion.

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