THERE is no doubt 2013 was a low point for mergers and acquisitions with the global mining downturn taking its toll but there are signs that activity will improve in 2014. Despite a continuing slowing of China’s economy, accounting firm Ernst & Young believes M&A activity has turned a corner.
The Mergers, Acquisitions and Capital Raising in Mining and Metals report by Ernst & Young said fewer deals were pursued globally in 2013 because of global economic uncertainty and less investor appetite for risk. It stated that in Australia the value of deals fell by 66% to $US5.5 billion - the lowest deal value since 2004 – with Chinese companies the biggest buyers of mining and metals assets.
The number of M&As globally fell to 703 but the value rose to $US124.7 billion because of the merger of giants Xstrata and Glencore. The report said 2013 also saw major miners like BHP Billiton and Rio Tinto sell off some projects with Rio selling its majority share of the Northparkes gold and copper mine in New South Wales for $US820 million to China Molybdenum.
Ernst & Young’s mining and metals transactions leader for Australia and the Asia-Pacific, Paul Murphy, says he is optimistic about demand from private equity investors and specialist
resources funds who have billions to invest. “Over the last 18 months, for example, they’ve raised in the vicinity of $10 billion for investment into the sector,” he said. “And I think over the next year or two we’ll start seeing that going into the riskier parts of the market.”
Data compiled by Bloomberg shows that of the $10 billion, only about 14% has been deployed, which leaves more than $8 billion as a pool of private equity money. This could be stirred this year by more attractive valuations, predictions of resilient demand for raw materials and belief that the bottom has already been reached.
Another good sign of a possible M&A recovery came at Mining Indaba in South Africa in early February with many experts saying there was more optimism apparent among the 8000 in attendance than throughout 2013, albeit cautious optimism.
The trend is supported by investment bankers and financiers. A Macquarie Group metals and mining spokesperson says private equity is looking at the mining sector with strong interest. Citigroup has recently upgraded its 12-month view on the industry from neutral to bullish, citing rising optimism that demand for raw materials from China will remain resilient, and stating that improving growth out of the US and Europe may also support prices. Brookfield Asset Management, which has about $180 billion in assets under management, says it is spending more time looking at mining opportunities now than in the past five years.
Consultancy EY says in a report that a steady improvement in market conditions should see a gradual return to deal-making. The report states: “The mining and metal sector is entering 2014 with a more positive outlook: confidence in the global economy is improving, companies have taken action to deleverage balance sheets and the industry-wide focus on productivity and efficiency should begin to yield results.”
Mid-tier miners seem likely to lead the M&A charge, especially companies generating healthy cash flow and earnings at these prices, and having the working capital to push forward. More than a handful of these companies, and some juniors, appear to have bottomed and are showing relative strength against the sector. They have value and potential even amid a struggling market.
Evidence of a recovery comes from recent deals, including B2Gold’s friendly acquisition of Volta Resources for $63 million. It was B2’s second acquisition in 12 months and followed its acquisition of CGA Mining, which cost $1.1 billion. Alamos Gold has also been active, having closed its acquisition of Esperanza Resources for $69.4 million and also closing a smaller acquisition of Orsa Ventures for $3.5 million.
New Gold also agreed to acquire Rainy River Resources for $355 million, PanAust acquired Glencore-Xstrata’s 80% interest in the Frieda River Copper-Gold Project in Papua New Guinea, Monument Mining recently acquired the Murchison Gold Project in Western Australia and Robust Resources has acquired a number of properties in the Kyrgyz Republic.