for those that don't wish to read the below, its just more of...

for those that don't wish to read the below, its just more of the same; no investment turn-around.


By: Natalie Greve
11th August 2014
Updated 6 hours ago

JOHANNESBURG (miningweekly.com) – Mergers and acquisitions (M&A) and capital raising activity in the metals and mining sector remained subdued over the first half of 2014, largely owing to a continuing commitment to capital discipline and a lack of urgency over investment, given the relative lack of competition for assets.
According to the 'Mergers, Acquisitions and Capital Raising in Mining and Metals' report by professional services firm EY, signs of improving economic growth in the US and the apparent subsidence of a looming emerging markets crisis had lowered broader market volatility, but had failed to offset ongoing concerns surrounding growth in China and further near-term commodity price volatility.
As a result, the mining and metals industry lagged a broader confidence revival in equity markets, while price weakness continued to place stress on certain sectors of the industry, despite considerable efforts by management to strengthen balance sheets and improve margins and returns.
“For those brave enough to invest against the cycle, there would appear to be good buy-side opportunities, albeit driven from a place of distress and opportunism, rather than out-and-out growth-seeking.
“The prospect of large-scale M&A remains unlikely for those looking to win back the hearts and minds of investors, such as the industry’s majors,” the report noted.
However, as EY looked ahead to the remainder of 2014, some standout deals and hostile bids over the first half, combined with a strong deal pipeline and substantial capital waiting to be deployed by mining-focused funds, suggested that momentum was building.
The report outlined that the recent and relatively rapid rise in the share prices of major mining and metals companies, on the back of improving base metals and gold prices, could prove to be a catalyst.
M&A TRENDS
Looking to M&A activity, EY maintained that a continued downward trend in M&A values and volumes suggested that 2014 was shaping up to be another “wait and see” year.
“Much of the industry remains focused on the optimisation of existing assets, while uncertainty surrounding near-term commodity prices is likely to keep deal values and volumes subdued.
“But the recent emergence of competitive hostile bids and narrowing price expectation gaps suggests the market believes that we have passed the bottom of asset pricing and that the time will soon be right to start strategic buying,” it noted.
Mining and metals deal values in the first half of the year were down 69% year-on-year, to $16.7-billion, from $53.8-billion in the first half of 2013, while deal volumes were down 34% over the same period.
“So far this year, we have only seen four ‘megadeals’, compared with 11 in the same period in 2013,” the report stated.
Further, 87% of first-half deals were valued at less than $50-million, but comprised less than 9% of total deal value.
Major diversified mining companies, meanwhile, continued to consider divestments as a means to reduce debt, maximise returns on capital and drive value across the portfolio.
However, with balance sheets largely stronger on the back of capital management, the urgency to divest had diminished and management could afford to focus on achieving an optimal exit for noncore assets, EY noted.
Overcapacity and a lack of clarity around global demand growth had continued to present a challenging environment for steel, metallurgical coal and iron-ore, which could lead to increased deal activity in these commodities.
“As weaker steel producers struggle to stay afloat, stronger operators are likely to take advantage of their distress, buying up assets and using scale to focus productivity on higher-margin capacity.
“More steelmakers may consider divestment or possible acquisition of downstream assets to reduce their exposure to the steel outlook,” read the report.
EY expected an increase in the number of joint ventures (JVs) and mergers in an effort to consolidate positions, achieve synergies and weather the continuing market uncertainty.
“We expect deal-making to pick up from current levels, but with a continued focus on low-risk transacting for the remainder of 2014. The industry is waiting for some commodity price stability before taking any adventurous steps, so the next half year may prove to be a waiting game,” it asserted.
CAPITAL RAISING ACTIVITY
Focusing on the capital markets, the report further outlined that an overall decline in proceeds raised in the first half of the year to $142-billion, from $168-billion in the first half of 2013, masked an ongoing divergence of fortunes within the mining and metals industry.
EY believed that the “wealth gap” between producers and explorers appeared to be widening.
“The happy coincidence of thirst for yield among bond market investors and competition between banks for scarce major deal opportunities, against a backdrop of near-zero real interest rates, has proven a boon for borrowers in recent years.
“This is even the case for the leveraged and higher-risk sectors of the mining and metals industry. The debt markets have supported a range of the industry’s financing needs this year, from acquisitions to bond repurchases, extensions and refinancing of revolving facilities,” stated the report.
Many mining and metals companies were able to reduce borrowing costs further this year and, critically, secure refinancing deals, as robust liquidity and strong demand led to large and sometimes oversubscribed syndicates, driving down pricing and terms.
“These market conditions look set to persist for at least the remainder of the year, with the wide expectation that the US Federal Reserve will wait until mid-2015 before raising benchmark rates,” it held.
Project finance was also, once again, flowing into the industry’s growth projects – albeit on a highly selective basis – with the mining sector seeing a nearly tenfold increase in project finance deals compared with the first half of 2013.
“However, we only need look to the equity markets to witness the stubborn contradiction of flagging investor confidence in the sector, and the extent to which the mining and metals industry is lagging prolonged growth acceleration in other sectors,” EY noted.
Alternative financing sources were now a staple component of industry finance and had continued to play an important role in the first six months of the year.
In terms of outlook, EY said a narrowing of the wealth gap was unlikely to occur in the near term, while a sustained and expectation-beating commodity price recovery would be needed for risk investors to return to the exploration sector.
As a result, capital would continue to be targeted toward more proven projects and management teams, through opportunistic M&A or offtake agreements, JVs, peer-to-peer consolidation and alternative funding structures.
“On the other side of the gap, the majors’ ongoing focus on internal cash generation through volume growth will continue to strengthen balance sheets and increase capital allocation options over the medium term, limiting the
near-term need to access significant new sources of funds in light of reduced capital expenditure plans,” the company forecast.
It added that the era of “cheap” public debt would not last forever, as the end to bond-buying by the US Federal Reserve was targeted for later this year, while expectations surrounding the timing of interest rate rises set the scene for revived volatility and tightened terms for borrowers.
“This will bring additional risks to an already capital-constrained and politically-charged infrastructure problem for the industry’s major long-term growth projects and the economies they support,” it maintained.