Deal value decline continues for global mining and metals in first quarter with 45% drop year-over-year

The FINANCIAL — First quarter global mining and metals transaction activity confirms the harsh reality faced by companies across the industry is far from over, according to EY’s latest quarterly analysis. Deal value fell 45% to US$3.3b in 1Q 2016 over the same period in 2015.

The report, Divestments: extracting hidden value, confirms the five-year downward trend in transaction activity failed to subside in the first quarter of 2016. Global deal volume followed the same downward trend with 72 deals in 1Q16 compared to 90 in 4Q15.

Lee Downham, EY’s Global Mining & Metals Transactions Leader, says:

“Prolonged commodity price volatility, widespread financial distress and subdued investment appetite continues to take its toll on transaction activity in the mining and metals industry. These forces aren’t driving the value or volume of deals expected at the outset of the year. Instead, we’re seeing greater restraint as companies wait to see whether we’ve finally reached the bottom of the market.”

Gold deals comprised over half of the quarter’s deal value at US$1.7b and 46% of the volume at 31 deals. Meanwhile, divestment processes from a number of diversified miners started to close out and accounted for the top three deals of 1Q16.

Downham says: “Those under duress and forced to transact in the current market conditions are examining portfolios and pursuing divestments to raise capital and strengthen balance sheets. This is a relatively new approach adopted by the industry after years of consolidation. Companies have to sharpen their sales skills to secure the best outcome for shareholders.

“Sellers must be able to communicate a compelling value story in order to attract buyers and create competitive tension in the process — especially when it comes to marginal assets.”

The report finds that more than one-third of executives (36%) see a lack of fully developed diligence materials as the main cause of value erosion in corporate divestments. And, when it comes to factors that induce private equity buyers to reduce offer prices or drop out of bidding, 44% of executives cited lack of confidence in information.

Downham says: “We expect deal activity to pick up over the remainder of 2016 compared to the first quarter. Divestments will continue to play an important role in the market as companies make difficult decisions on how best to position operations through continued volatility.”