A global economic slowdown, political uncertainty and low commodity prices are continuing to squeeze the mining and extraction sector. An analysis shows that M&A activity is significantly down on last year, despite an uptick in transaction volume in the second quarter. Capital raising remains relatively robust.
Commodity prices have tumbled in recent years on the back of a slowdown in China and increased global uncertainty and lacklustre economic growth. Oil prices and gas prices, in particular, have dropped – throwing the respective sectors into a period of acute stress. Copper prices too have seen significant falls, dropping from heights of around $4.5 to $2.2 per lb, while iron prices have halved over the past two year period.
While the mining and extraction industry has a relatively robust war chest built up during the good times, the protracted period of low commodity prices has started to affect jobs as well as see companies divest to pay down debt and weather the storm. The long term outlook for oil remains mixed, with long terms sustainability predicted to see peak demand by 2030.
In new analysis from EY, the consultancy firm finds that M&A deal activity within the global mining and metals industry is significantly down on last year, with the largest activity seen in the Asia-Pacific region.
Following a large fall in value in Q1 2016, generating just over $4 billion in value on 82 deals, Q2 2016 saw a 93% increase in activity – hitting almost $8 billion in deal value while deal volume increased to 104. The period still remains relatively depressed relative to Q2 2015, where there were around 95 deals with total value more than double that of the most recent quarter, at just over $16 billion – although the $8.7 billion BHP Billiton demerger skews figures.
Regionally, the Asia-Pacific saw the largest value, hitting $3.6 billion in Q2 2016 – deals include Sumitomo Metal Mining’s $1 billion acquisition of a 13% stake in the Morenci copper mine. Activity in North America was relatively active, with 56 deals representing 54% of activity on the back of gold sector mid-market consolidation.
Lee Downham, EY Global Mining & Metals Transactions Leader, reflects that “There is a significant amount of speculation around whether we’ve finally reached the bottom of the market, and this rise in M&A activity certainly suggests growing confidence in the mining and metals sector. Companies – especially mid-tiers and majors – continue to reassess and reduce portfolios to strengthen balance sheets and inject more flexibility into their business models. That, coupled with growing confidence, is translating into increased deal activity.
In terms of capital raised, the majority in the latest quarter was again from debt, at around $50 billion, equity proceeds has ticked up from the previous quarters however, standing at almost $10 billion. The value raised was down 5% on the previous quarter and down 28% on Q2 2015.
In terms of asset classes for capital raise, bonds fell from $26.7 billion to $17.2 billion, while loans dropped more than $10 billion, from $44.6 to $34.5. Follow-ons fell slightly, from $11 billion to $7.7 billion.
Downham adds, “The theme of strategic divestments continues to dominate the transaction landscape, with China demonstrating an appetite to meet vendor expectations on value for world-class assets. Deal activity is likely to remain rocky in the coming months as the sector adjusts expectations and realigns portfolios in response to the current market conditions.”