The FINANCIAL — EY analysis shows the total value of completed deals in Q1 in the sector dropped 18% to US$5.9b compared to the same quarter last year, while volume nearly halved year-on-year to 79 deals. Both deal volume and value in Q1 2015 fell by around a third compared to Q4 2014.
While divestments of non-core and distressed assets, particularly in the coal and gold sectors, remained key drivers of deal activity, acquisitions by private financial investors accounted for 28% of deal volume in Q1, albeit of a small total, according to EY.
EY Global Mining & Metals Transactions Leader, Lee Downham says: “While private capital investors continue to show patience, distress in the sector is likely to be the key driver of activity. Companies in the iron ore and coal sectors face the most immediate financial challenge, but there is a wider need for restructuring across the sector and we may see quality assets coming to the market in order to release much needed capital among multi-commodity producers.”
Mid-tier consolidation to unlock synergies and increase scale to lower costs is emerging in the gold sector, particularly in North America and Mexico.
Downham says: “Interestingly, buyer competition was identified as a key challenge to deal strategies by more than a third (35%) of the mining and metals sector respondents in EY’s latest biannual Global Capital Confidence Barometer, and we expect to see that play out in some commodities earlier than others”.
EY’s Global Capital Confidence Barometer, is a biannual survey of more than 1,600 executives in 54 countries, including 63 respondents from the global mining and metals sector.
Not surprisingly, increased volatility in commodities and currencies was the main factor concerning mining and metals respondents in the Barometer, identified by 39% of respondents as the greatest economic risk to their business over the next 6 to 12 months.
The Barometer found the proportion of mining and metals companies focused on growth has fallen from to 29% compared to 44% a year ago, reflecting the downturn in commodity prices.
Despite this, almost half (49%) expect to actively pursue an acquisition in the next 12 months while the same number expect the M&A market to improve – albeit from decade-low levels in 2014.