MINING FINANCE / INVESTMENT
Mining M&A appetite restrained in favor of smaller, lower-risk deals—E&Y
Mining and metals companies cite growth as their main focus, but plan to achieve this from an improved base of operations where efficiency and cost control are top priorities.
Posted: Thursday , 09 May 2013
RENO (MINEWEB) -
Despite their more optimistic view of the global economy, an Ernst & Young survey of 193 mining and metals sector executives finds only 24% are focused on mergers and acquisitions.
Those surveyed anticipate 91% of mining and metals M&A deals will be below US$500 million in value.
“Instead, companies are opting for lower risk organic growth, optimizing capital structure and strategic divestments,” said E&Y in its latest Global Capital Confidence Barometer. “For those among which M&A is still a priority, smaller bolt-on acquisitions are preferred.”
The survey also found that 46% of mining and metals companies believe that credit availability is improving. “While challenges persist in certain markets, respondents remain optimistic about the availability of credit.”
“We are seeing funds flow into the sector as an alternative to debt and equity, ranging from equipment and infrastructure providers; national and development banks; streaming and royalty agreements, and private funds looking to achieve returns for private investors and institutions,” said E&Y.
The survey also revealed that 54% of mining and metals companies have a greater focus on capital allocation, up from 44% six months ago.
“Capital allocation decisions are becoming more complex and consequently are moving up the boardroom agenda,” said E&Y. “Mining and metals companies must balance the demands of their equity shareholders with those of local host governments, employees and local communities—all of which have different priorities and differing investment horizons.”
“One way many mining and metals companies have reacted to this is through declaring a capital strike and rapidly cutting back on their capital spend—but at what cost? There is a risk that this could be taken too far where scaling back on investment may damage the longer-term prospects of a company and its ability to maintain its social license to operate,” said E&Y.
“Despite this capital strike, respondents still believe that greater returns can be generated through developing project pipelines above returning cash to shareholders; only 17% of mining and metals respondents are intending to increase their focus on returning cash in the form of buybacks and dividends, despite a greater call from shareholders to do so. However, the pressure to return capital to shareholders, remains greater for the larger mining companies,” said E&Y’s Global Mining and Metals Transactions Group.
The survey also revealed that companies are more focused on growth compared with six months ago, as the pressure to replace reserves and maintain production mounts. “Growth is expected to be achieved by continued investment into lower-cost, high-margin projects; albeit at a slower pace than witnessed during the past five years as a new era of capital discipline takes hold,” said E&Y.
“While mining companies currently pause for breath, we expect to see a steady approach to growth in the short terms as the newly appointed CEOs of the industry’s majors attempt to appease investors who have made it clear that long-term investment with large capital outlay and significant potential risk will not be rewarded.”
The survey found that 69% of the respondents believe there will be a greater focus on efficiency and cost control to a year ago.
Meanwhile, E&Y observed, “There is a strong appetite for divestments in the sector where 43% of mining and metals respondents of Ernst & Young’s record Global Corporate Divestment study revealed they expect to initiate divestment plans over the next two years.”
However, E&Y cautioned, “As management continue to pursue divestment strategies, those ignoring M&A opportunities may be missing out in an environment where valuations are depressed, providing potentially attractive returns on deals offering synergistic benefits.”