Merger activitiy expected to heat up in 2014

May 8, 2014

A new study from Ernst & Young suggests it could be a busy year for mergers and acquisitions in the mining and metals industry.

Private-equity firms with as much as $20 billion of funds will increase the number of mining deals this year after a steep decline in the first quarter, Ernst & Young LLP said.

In the first quarter of 2014, there were a total of 135 M&A mining and metals deals worth $6.7 billion globally. This was down 31 percent and 67 percent respectively compared with the same quarter a year before, although deal volume was on par with the fourth quarter of last year, Ernst &Young said in its quarterly mergers and acquisitions report.

At the same time, the appetite for mergers and acquisitions is picking up as evidenced in Ernst &Young's Capital Confidence Barometer survey of more than 1,600 executives, including 128 in the mining and metals sector.

According to the survey, around 60 percent of mining and metals respondents expect global mining and metals deal volumes to improve in the next 12 months, while 53 percent of the mining and metals companies surveyed said they have a pipeline of two or three deals over the next 12 months.

“The Q1 completed deal numbers don't really reflect what we are seeing in the market as the rate of announced and yet-to-be-announced deals has increased,” said E&Y's Global Mining & Metals Transaction Leader Lee Downham. "There remains a backdrop of caution, however the mood is much more positive. We are beginning to see that translate into confidence to do deals, as reflected by the large pipeline of announced acquisitions, particularly in the gold sector.”

There was 46 transactions worth $728 million completed in the gold sector in the first quarter. It was the second most actively acquired commodity by deal value after steel, which transacted $4.02 billion worth of deals.

The survey also showed that companies remain cautious about mergers and acquisitions, with 65 percent of respondents targeting assets with a deal size below $250 million, compared with 44 percent six months ago.

"This is not surprising when we consider that companies' capital allocation decisions are under increased scrutiny and that many have suffered impairments on recent large-scale acquisitions due to the fall in commodity prices," E&Y noted in its barometer report.

Downham said he expected deal volumes to gradually increase, driven by larger miners streamlining their portfolio of assets, financial buyers scooping up mining assets, and consolidation amongst juniors and mid-tier mining companies.

Private capital funds are expected to play a role in that growth, with an estimated minimum $10 billion in hand. Financial investors have already been active in the space, accounting for 34 of the deals in the first quarter.
 

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