After the frenetic activity in the mining sector two years ago, uncertainty about the trajectory of commodity prices is likely to subdue the level of M&A deals this year. Nervous equity markets and restrained lending by banks will reinforce the cautious trend set in 2012.
Yet, as metal prices stabilise and companies bet on the continued rise in commodity demand from countries such as China, transactions are still expected, albeit at a cautious pace, according to a mining report released by PwC yesterday.
“Deal activity globally in 2013 is expected to continue at moderate levels, well behind the frenzied pace of 2011 as miners continue to be alert to good opportunities but are ever more mindful of risk factors such as rising costs, resource nationalism and potential political issues with buying and selling assets,” said Ken Su, PwC China mining and metals leader. “The appetite for controversy is decreasing as miners are wary of the publicity of past deals which may not be viewed as being successful.”
There were 1,803 mining transactions in 2012 — the lowest level since 2005. Deal volume in 2012 also fell more than 30% as compared to 2,605 transactions in 2011, and the value of those deals dropped to $110 billion in 2012 (including the $54 billion Glencore-Xstrata merger) from $149 billion in 2011.
Su believes that other mega-mergers are “will be placed on the shelf” this year, as miners focus on prudence and aim to realise gains from acquisitions made in previous years.
“We expect to see asset rationalisation and senior miners looking to divest non-core assets and looking to de-risk projects through joint ventures as well as some bargain hunting where share prices are depressed or where there are funding challenges,” he said.
On the positive side, he expects that outbound M&A activity from Chinese resource buyers will continue because the country’s long-term demand for energy and natural resources to fuel economic growth remains a priority. However, he warned that the urgency is not as great as it was in the past.
Meanwhile, global miners will face a challenging funding environment, as they did last year, along with other industries, due to nervous market sentiment and difficult economic conditions. Mining equity financing in 2012 was half the level of 2011.
Yet, the “optimum source of funding remains the equity markets, since banks will not easily loan funds to smaller operators in early stage of production, especially in times of economic uncertainty”, Benson Wong, PwC Hong Kong mining leader, told FinanceAsia. That should provide a boost to Hong Kong’s fledgling ambitions to be a major listing destination for mining companies. There have been more that 10 IPOs within the industry completed each year during the past three years, raising more than HK$150 billion.
“An attractive listing environment and being at the doorstep to a China hungry for minerals and resources have been at the heart of an increasing number of companies choosing to list in Hong Kong,” said Wong. “Hong Kong is becoming a listing hub for big players who were ready to mine proven reserves, to help meet China’s insatiable demand for resources.”
The Chapter 18 listing rules requirement that miners must show they have proven reserves could be perceived as a disadvantage. But, “it ensures quality IPOs which although maybe fewer in number compared to if all explorers were allowed to list, does tend to ensure higher fund raising levels are achieved”, he argued.
As for the outlook for individual metals, PwC favours gold, copper and uranium. ”Gold is becoming more and more of a hot commodity for deal activity and is expected to be a focal point for Chinese buyers,” said Su. “We are also seeing a shift from steel making ingredients to base metals with particular interest in copper which is considered a bet on the future health of the global economy as the metal is used in everything from plumbing and power to automobiles.” Indeed, gold and copper dominated M&A activity in 2012, accounting for half of the top 20 deals last year.
Uranium should also be interesting this year, as producers take advantage of prices that have been depressed since the March 2011 Fukushima nuclear facility disaster in Japan.
