Latest Ernst & Young report shows uncertainty among mining dealmakers
Although the latest figures show a global fall in mergers and acquisitions (M&A) activity in the mining industry, there are indications that things will pick up in the second half of the year.
The new Ernst & Young report on the mining sector shows that mining M&A in the first half of 2012 was down on the same period in 2011 by 38 per cent in value terms. And it was not just the value that fell, the volume of deals was also notably down on last year, falling by 19 per cent.
Some 470 deals were completed in the first half of this year, with a combined value of $55.7 billion. North America was one of the most active regions, accounting for $10.4 billion in deals as a target destination and $12.1 billion as an acquiring destination. However, Asia Pacific led the way from both perspectives, with Chinese mining firms acquiring $17 billion worth of global mining businesses alone.
The most in-demand commodity was coal during the first six months of the year, with copper coming a close second. The popularity of coal was driven by the fact that power utilities and trading firms were buying up coal assets to safeguard their supplies. However, in terms of volume, mining firms specializing in gold were the most actively involved in M&A, with 160 deals targeting gold assets.
Although generally, M&A activity in the mining sector was down, Ernst & Young has pointed out that the number of megadeals (or those worth over $1 billion) were actually up by 25 per cent in the first six months of the year. A total of 20 megadeals were completed, compared with just 15 between January and June 2011. Analysts claim that this increase in high-value deals could be an indication of a growing emphasis on synergistic and opportunistic M&A activity.
Ernst & Young suggests that this trend could continue into the latter half of 2012, when growing through acquisition is likely to make more financial sense than organic growth, which is expected to become more expensive. The focus on M&A is expected to be squarely on familiar territory. An example of this is the recent news of Mining Developments Georgia and Mineral Resources Management’s purchase of GPM Georgia.
Lee Downham, Ernst & Young’s global mining and metals transaction leader, said, “Rising development costs are forcing companies to rethink investment decisions and already we have seen significant deferrals on capital spending. At the same time, equity valuations are lower, so it is likely t this will drive opportunistic deal activity.”
It seems that the economic concerns that held back M&A deal activity in the sector at the beginning of the year may be overtaken by the desire to create synergies and grow through acquisitions. The fact that Ernst & Young’s latest Capital Confidence Barometer established that 70 per cent of mining firms that responded said they are planning divestment in the coming year accentuates this possibility.