• Mining M&A expected to double as market elements align

Key findings from Gathering momentum mining report

According to a new Grant Thornton report, the mining sector will herald a new era in mergers and acquisitions (M&A) as a near perfect alignment of factors takes place.  Following a slow period for transactions, in which last year’s deal volumes failed to breach the $90bn mark[1], Grant Thornton’s research and analysis suggests that a fertile environment will next year lead to a doubling in the value of M&A in the mining sector compared to 2013, irrespective of potential mega-deals such as Glencore and Rio Tinto.

Gathering Momentum, the new report, attributes the resurgence of M&A to the confluence of four main factors, identified through feedback from over 250 senior mining executives globally. The first is that with one-in-ten junior miners likely to enter administration and a quarter of major mining companies anticipating challenges with financial covenants, the market can expect significant quantities of distressed assets and low valuations. There is also a ripe environment for matchmaking, with a third of executives at mining companies stating that they are likely to make an acquisition (35% junior and 32% major) and approximately the same amount showing an appetite for selling - believing that their company will either be sold or undergo a partial sale (36% junior and 27% major/other). Furthermore, lower commodity prices are identified by the report as a driver for M&A; pushing companies to band together to generate scale and lower productions costs in order to remain competitive.

Chris Smith, mining leader at Grant Thornton UK, 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 Glencore’s approach for Rio Tinto and 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 commodities market.

“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 $8 billion –and they are looking for investment opportunities in mining. If these appetites persist the value of transactions for next year, in 2015, will be double that achieved in 2013. There is already a good deal of momentum and we believe that the value of transactions this year could increase by 75%, and that’s without any mega-deals from Glencore.”

According to Grant Thornton, the financial downturn has been especially difficult for junior miners with hundreds of companies still facing financial conditions that threaten their existence. 59% of junior miners interviewed stated that they need to raise additional funds in the next 12 months and a third stated that as a result they were considering a corporate transaction or merger.  It is likely that valuations will be low given the financial situation these companies find themselves in.

Chris Smith, said: “It’s an untenable situation for many mining companies.  When junior miners don’t hold funds to support operations, they enter a capital ‘Catch 22’ – weakened so they can’t sustain operations to generate cash flow and unable to source affordable funding.”

Despite recent gloom, however, industry executives and suppliers expect the sector to bounce back. They express optimism for the future, viewing recent turmoil as a correction — a painful but necessary overhaul that will lead to a more robust future.

Chris Smith, continued: “Arguably the conditions that will drive M&A activity wouldn’t have come about without the correction of the past four years.  But, just like a planetary alignment these conditions won’t last forever.  Buyers and sellers will need to take consideration of issues such as valuations and be prepared to execute strategies decisively.”

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[1] Source: ThomsonONE. Excluding Glencore International and Xstrata merger.