Regaining confidence in Mining M&A

2013 was one of the worse years for mining industry merger and acquisition (M&A) activity in nearly a decade. The volume of deals fell to its lowest level since 2005, while the overall value was at its lowest point since 2004. Falling commodity prices combined with over-burdened balance sheets, a focus on cost control and some eye watering impairments all fed into the M&A slump.

Despite the lack of activity a number of themes have emerged. Most notably, the Eastern world dominated deal activity over the often-prevailing West in 2013. “There was a role reversal that could carry on in 2014 as miners continue to grapple with volatile commodity markets, nervous investors and uncertain global economic growth,” says John Gravelle, PwC’s Global Mining Leader.

Enter private equity?
Does 2014 mark the year when mainstream private equity enters the mining sector? There has been talk since 2012 but limited major deal activity. A number of new funds have successfully raised committed funding over the last 6 months and are actively looking for deals.

Closing the valuation gap between buyer and seller remains hard.  We see sellers wanting value for future commodity price forecasts but sellers wanting to base pricing on current commodity pricing levels. In addition, sellers of non-core assets are looking to price in the benefits of a greater level of management focus on the asset. Understandably buyers are not wanting to pay for this.

Regaining confidence in 2014:
Deal activity is already off to a strong start in 2014. We have seen QKR’s acquisition of the Navachab gold mine from AngloGoldAshanti as well as Goldcorp’s hostile bid for Osisko. Does this mean that miners believe we have reached a low point in the run on the gold price?

We expect activity to gain momentum throughout the year, depending of course on the direction of commodity prices. Companies have been cleaning up their balance sheets and putting off decisions, waiting for the right time to pounce. For many, we think that timing is near.

It will still take time for investors to regain trust in miners, and in turn give companies the confidence to pursue more M&A. Still, we see better times on the horizon.

Over the next 6 weeks we will be looking at key themes for mining M&A expected over 2014. In particular we will look at the rise of joint ventures in the industry, an analysis of the major deals strategy in 2014 and an analysis of the mid-tiers deal strategy in 2014.

Share your thoughts below or contact us to set up a meeting to discuss things more confidentially here.

Read our latest report, '2014 Global Mining Deals outlook' here

Jonathan Lee | Director – Natural Resources, Transaction Services
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