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IMA Executive News & Views Blog

Activity to Shape Portfolios for Future Growth and Sustain Shareholder Returns

By Lee Downham

Ernst & Young (EY) is an IMA B2B Partner…

  1.  M&A activity will transition from divestment-led to strategic deals.

There was a 15% increase in deal value in 2017, although the overall number of transactions actually fell by 6%. Having paid down significant amounts of debt, we saw a notable shift to strategic deals over the second half of the year, as management once again focused on growth.

Over 250 webcast participants were in agreement, with just 14% expecting further divestments to drive M&A. Interestingly, the majority of participants felt that M&A activity will be driven by portfolio consolidation in existing commodities, despite the recent excitement over battery-led demand for metals such as lithium and cobalt, which feature in relatively few portfolios right now.

  1.  The focus is now on crafting reinvestment strategies for growth.

Project impairments and write-downs, which have previously characterized the sector, continue to shape growth strategies. Despite improved balance sheets and greater access to capital, a wait-and-see attitude was adopted in 2017.

Our analysis suggests that top producers had an average debt–equity ratio of around 30% at December 2017. Despite the improvement in debt capacity, only 20% of our webcast participants felt that debt will be a key instrument to fund growth, with miners remaining cautious about placing additional debt on balance sheets. Instead, we expect to see innovative strategies being crafted; a focus on assets in development, for instance, will minimize lead times before projects actually generate cash flows and reduce various project risks. More importantly, stronger valuations will underpin the usage of equity as currency, perhaps enabling larger deals to be executed with minimal additional debt.

  1.  The emphasis will be on a balanced capital agenda that rewards shareholders.

Capital allocation by mining and metals companies continues to favor, rewarding shareholders through dividends and share buybacks, over reinvestment. Recent results by majors have reasserted this position; Rio Tinto, for instance, pledged almost US$9.7b in cash returns to shareholders after generating a cash flow of US$13.8b for FY2017.

Over 45% of our webcast participants ranked increased dividends and project expansion as the top two priorities for capital in 2018, while just under 11% felt debt payment will still be on agenda. Payment of debt in the sector has also reduced financial risk, which has helped drive up shareholder returns.

It is expected that far less cash will be allocated for debt payments as most organizations have deleveraged significantly. Sustaining shareholder returns will inevitably involve executing long-term projects and we expect decision-makers to rebalance capital allocation with an increasing appetite for growth.

What’s next?

As mining and metals organizations look to growth, efforts to restructure and optimize portfolio composition will take center stage. Already we have seen prospective buyers starting to look at copper, lithium and cobalt projects, lured by the potentially transformational demand that battery-led technologies suggest.

An investment preference for developed, more stable regions is anticipated, which was supported by our web poll results.

Against this backdrop, the strategy of building for tomorrow is gaining momentum. Some sector participants will move early to execute strategic deals, albeit capital will first be targeted at enhancing productivity of existing operations.

Either way, the worst of the cyclical downturn appears to be truly behind us and decision-makers are now readjusting strategies to maximize returns on the back of a new landscape.

 

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