Business risks facing mining and metals 2012 – 2013


Link directly to the report now.

I wanted to bring your attention to an informative report put out by Ernst & Young on the current state of M&A within the mining sector (see link below).  Some highlights of the report include:

  • Due to increasing capital costs and weaker metal prices would normally see increase in M&A activity as it is cheaper to buy then build.
  • Due to increased political and macro-economic risks, this is not occurring and has been steady decline since 2010
  • Risky bets and high premiums for unproven mineral reserves will no longer be the case, and will instead move toward JV, investment in companies (not outright acquisitions) as well as merger activity
  • Synergies need to be found in order to reduce or control capital cost inflation
  • 20 (>$1bn) deals done in H1 up from 15 in H1/2011
  • Asia-Pacific region most active with China dominating deal flow
  • Coal most targeted commodity
  • Gold had 160 deals done in H1/2012, but lower average deal size of $40m down from $62m in H1/2011
  • Capital raising is down 35% Y-o-Y to $128bn – equity raises continue to decline with corporate bond issues at record levels

Overall, they see lower valuations, increasing capital costs of organic growth, synergistic opportunities and an M&A focus on existing or well-known jurisdictions and projects as factors to drive deal flow going forward.  Dealmakers likely to be ones bullish on China and can work within volatility.

Do not expect to see a slowdown in the aggressive buying by Asian-Pacific, and specifically, Chinese companies.  As valuations continue to dip lower and the desperation of certain cash strapped companies becomes more of a reality, I believe you will see more M&A and at accretive valuations since companies looking to acquire are sitting on cash, and lots of it.

View the report.

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