Ernst & Young looks for strong M&A activity in 2014

February 3, 2014

With as much as $8 billion of private-equity money waiting to be put into play, favorable prices and large assets being offered by some of the largest players in the industry, mergers and acquisition activity in the mining sector is expected to heat up in 2014.

According to consultancy and accountancy firm Ernst & Young 2014 could be the year to end the seven-year low of mergers and acquisitions volume.

Buyout firms have increasingly targeted mining since 2012, however, only about 14 percent of nearly $10 billion raised in the last two years has been deployed, according to data compiled by Bloomberg Industries.

In 2013, mergers and acquisition activity in the global mining and metals sector reached 703 deals valued at $124.7 billion in 2013, the consultancy said in its mining and metals mergers, acquisitions and capital-raising report. Excluding the all-share merger of Xstrata and Glencore, deal volumes and value were down 25 and 16 percent year-on-year to 702 and $87.3 billion, respectively. This marks the lowest number of deals in the sector since 2006 and the lowest global deal value since 2009.

Capital raising followed a similar trend, with a 9 percent decrease in total volume to the lowest level seen since the 2008 global financial crisis. However, total proceeds increased 9 percent to $272 billion, largely due to some exceptional loan refinancings, The Wall Street Journal reported.

"The extreme price volatility and rapid changes to the global economy in 2012 and into 2013, combined with large impairments and senior management changes across the sector, meant the risks in doing deals in 2013 were just too great given the moving base on which decisions needed to be made," said Ernst & Young's global mining and metals transactions leader, Lee Downham. He added that although there were a number of assets up for sale last year, deals failed to close because metal price volatility continued to create a price expectation gap between buyers and sellers.

Downham told The Wall Street Journal that the third quarter of last year is widely seen as the bottom of the market, with the foundations set for a gradual return to M&A activity this year.

"Confidence in the global economy continues to improve, larger companies have stronger balance sheets, and the focus on productivity and efficiency should begin to yield margin improvements. This should provide a better environment for both deal making and capital raising," Downham said.

Financial investors and equity-backed alternative capital providers are forecast to become particularly active in the M&A market in the first half of 2014 after having spent last year amassing more than $10 billion in funds, he said.

E&Y expects to see a greater proportion of the sector's funding to come from equity through follow-on raisings during 2014 and a stronger appetite for debt issuance due to improving access to leveraged loans for quality midtier miners and developers.

The Wall Street Journal reported that initial public offering volumes were down 70 percent to 26 last year, one of the lowest numbers in at least a decade, with only $815 million raised, the consultancy said. Proceeds raised from follow-on issues increased about 1 percent to $26 billion, but proceeds raised by junior explorers fell by 43 percent to $5.9 billion. Nevertheless, overall loan proceeds across the sector increased 40 percent to $149 billion last year.


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