Ongoing volatility and an ever-changing macroeconomic environment made executing deals extremely difficult in the mining and metals sector in 2016. What can we expect this year?
- M&A deals to pick up as miners stocks rally
The rebound in commodity prices in 2016 swung miners back into profitability but they have signaled a focus on organic growth and returning cash to shareholders ahead of acquisitive growth transactions. Webcast participants were in agreement with our view that strategic buyers would continue to drive deals if opportunities arise; around 45% of respondents believed strategic buyers would drive M&A in 2017, and some 27% thought asset disposals and portfolio realignment deals would continue in the year ahead. Just a few participants expected private equity players to drive deals; in recent years the gulf between buyer and seller valuations limited deals despite private equity players having significant dry powder.
- Equity markets will see significant growth as source of funding
During 2016 IPOs all but dried up with just over $100m raised over the year, compared to the peak of over $18b back in 2010, a year I remember being one of the busiest in my career! Similar to our expectations, over 35% of webcast participants thought IPOs would see a big jump in 2016, higher than follow-on equity and debt markets. While the credit outlook for miners is improving, mining companies are expected to focus on reducing cost of capital through refinancing deals. With alternative funding sources remaining available on the market, most participants concurred that achieving the right mix of capital will remain a central focus for mining companies.
- Capital discipline to continue despite improved profitability
Gone are the days when mining companies were quick to switch to growth at the earliest hint of a change in fundamentals. Over a third of webcast participants believed that cost reduction and productivity will remain a priority for mining companies. Reinforcing my own feeling from conversations in the market, the webcast participants sense some caution; in the short term at least. This is perhaps justified by expected continued volatility in commodity prices given persisting global economic uncertainties. Growth prospects in China, the major consumer of commodities, remains unclear. Emphasis is therefore shifting to building low cost portfolios that are able to survive cyclical shocks. In the meantime, excess cash is expected to be returned to shareholders through dividends and/or share buyback programs.
Looking ahead
The key drivers of deal activity will diverge by commodity and in some cases by region. Looming supply deficit for copper, for example, will be satisfied by investments in other regions due to scarcity of new deposits and falling grades in traditional suppliers such as Chile, Australia and Indonesia.
Against this background, which path to carve will depend not only on the current competitiveness of assets in the miner’s portfolio but also on the ability of those assets to withstand cyclical headwinds. Ultimately the winners in this game will be those with synergistic portfolios; whether they are diversified or choose to focus on a single commodity or even selected geographical regions.
Source: Linkedin
