You are currently viewing our desktop site, do you want to download our app instead?
Moneyweb Android App Moneyweb iOS App Moneyweb Mobile Web App

NEW SENS search and JSE share prices

More about the app

2015, the dearth of mining M&As

More deals announced, but less are expected to be concluded.

The mining and metals sector is braced for another tough year, with returns set to disappoint investors while mergers and acquisition (M&A) activity is expected to be weak.

The year 2014 for the mining sector has been described as tough and 2015 will be no different, chiefly due to the commodity price slump that is expected to dent the level of deal making.

“With commodity prices falling [in 2014], it was difficult to take a view of effectively putting together a business plan to target an acquisition on the basis where you can have a degree of confidence in underlying numbers,” said Standard Bank global head of mining & metals Rajat Kohli.

The price of gold fell to $1 265 an ounce in 2014 from $1 411 in 2013 while copper dropped to $6 866 per tonne from 2013’s $7 327. Other commodities followed suit; iron ore in 2014 crashed to $97 per tonne and thermal coal to $72 in the same period.

As commodities lost their sparkle, investors shunned the mining sector as a viable investment option, knocking the confidence of CEOs and boards to undertake M&A activity.

“M&A thrives on confidence and that was lacking last year. The reality is that the mining sector has disappointed investors. And they have been disappointed in terms of share price performance [of equities] as well as returns generated,” Kohli added.

Capital raised

However, 2015 is set to see a moderate turning point for deal making across all commodity categories. More deals will be announced, but the bulk of these deals will not be cemented due to financing challenges in the sector.

Standard Bank’s estimates suggested that equity proceeds raised to fund deals halved from the 2009 highs of $92 billion (R1 trillion) to $42 billion (R484 billion) in 2014.

Source: Standard Bank.

“Because CEOs and boards of mining companies will feel the financing pressures, they will be running out of cash,” Kholi said. “They will see their cash flows coming up because commodity prices are lower and they will find it quite tough to refinance or raise new funding.”

Of the selective equity raising options available, major mining companies with the best assets and management abilities, track records and balance sheet stand to benefit. 

“Debt markets are available but expensive especially for mid-tier and junior mining companies,” said Kholi. He explained that in the last five years it was easy to announce transactions, but to conclude them proved difficult, given financial pressures and regulatory requirements governing the mining sector.

The volatility of the market is set to make junior miners vulnerable to takeover targets. “As juniors become vulnerable, the major operators will be able to pick up assets. What we see in the M&A space is a lot of option value in the market. We are likely to see a few of those vulnerable assets shaken out and potentially rescued,” said Sandra du Toit, a director in Standard Bank’s mergers and acquisitions division.

During the boom years of 2009, many companies were using cash and profits to reinvest in flagship projects – which, Kholi said, were often “over capitalised, overbuilt and under delivered”.

“And consequently shareholders saw less dividends returned and more capital being put into business. Investors remain cautious of the mining sector and money continues to be rotated out and money is put into sectors such as telecommunications and financial services,” he explained.

Beyond sector-specific issues, the slowdown of China’s economy is expected to add more woes to the mining sector. The Asia-Pacific country is the biggest consumer of precious metals and with its growth rate slowing down; the demand for commodities is set to slow. The country’s growth rate is expected to moderate to 7% in 2014 from 10% in 2009.

“China’s voracious appetite for commodities grew [in 2009] and had many projects funded and built in different commodities. Supply from those projects is heading into the market now and that’s obviously having a modest negative impact on commodities,” he said.

A lot of the headwinds expected will mean that mining counters have to get good sponsors, become competitive and manage resources efficiently, noted Jaco Kriek, head of the bank’s mining and metals division.

“You will review your book focus on quality. It is quite obvious, but some forget the basics in this business,” he said.



Comments on this article are closed.





Follow us:

Search Articles:
Click a Company: