Mergers, acquisitions and capital raising activity remained subdued over the first half of 2015, with the mining and metals sector remaining largely focused on portfolio management and capital returns instead of exploring options for growth, according to professional services firm EY.
The trend in the industry has been towards simplifying portfolios while riding out near-term commodity price and demand uncertainty.
In line with this, EY has noted a 30% decrease in deal compared with the same period in 2014, dropping to $12.7 billion (excluding the BHP Billiton demerger), while deal volumes have also decreased by 43% to 170.
EY has found that almost 80% of the deals undertaken were valued at less than $50 million and comprise a mere 5% of the total deal value for the year so far.
Despite this, deal volume increased slightly, quarter-on-quarter, by 2% to 86 deals, and deal values increased 13%, even when excluding the $8.7 billion BHP Billiton demerger.
Slight upward trend in M&A activity expected
EY noted a modest uptick in activity during the second quarter of the year, excluding the South32 deal. This is expected to continue into the second half of the year, albeit at a slow but steady pace.
The emergence of some strategic buying and consolidation at the mid and lower end of the market suggests some are thinking ahead.
Producers that have successfully simplified their commodity focus or merged into larger operations may consider leveraging their new positions to buy distressed assets that will complement their portfolio.
Others may see the slump as an opportunity to solidify their base in anticipation of a time when the larger players will return to acquiring strong assets to generate growth.
Depressed commodity prices, investor perception of risk and the attractiveness of other emerging growth industries resulted in the capital-constrained fund-raising environment, which persists in the mining and metals sector.
The value of the proceeds raised in the first half of the year are in line with first half of last year.
In terms of capital raising in the first half of the year, there has been a marked increase in follow-on equity raisings, bond issuance and convertible bonds, in stark contrast to a persistently weak IPO market, with only six IPO’s in the first half of the year compared to eight in the first half of 2014.
The first half of the year saw an almost 100% increase in follow-on equity issues and a 50% increase in bond issues compared with the comparable period last year, which is indicative of producers fund-raising to support continued operations
Cautious sentiment with intermittent signs of hope going forward
The majors are typically in a position where they don’t need to raise funds and can do so at relatively low cost if the need arises, owing to their benefits of scale, internal cash generation, reduced capex plans, stronger balance sheets and retained earnings.
Capital raised is being used cautiously by mining and metals companies, with management teams deploying funds toward proven projects, peer-to-peer consolidation and joint ventures.
The productivity of invested capital is a key issue for CEOs, with a focus on achieving predictable return on investment outcomes from complex capital-intensive developments.
As such, maintaining the current level of equity raising will likely remain difficult in the foreseeable future, with companies raising capital opportunistically says EY.
On the debt side, yield-seeking will continue to quell wary and patient investors, and serve an important fund-raising function for mid-tiers and juniors.