Macroeconomic factors weighed heavily on the commodities markets in 2016, creating much of the volatility that continued to pose a challenge for mining companies and the transaction environment. In the face of these challenges, we still saw many transactions close in 2016 and we expect the upward trend to continue in 2017. Based on an analysis of last year’s trends, EY’s recent report on global M&A (Mergers, acquisitions and capital raising in mining and metals – 2016 trends, 2017 outlook) predicts a cautious return to deal making and capital raising this year – welcome news for this industry.
2016 mining M&A trends
Let’s look at last year’s numbers. Canadian deal volume rose 16% last year, to 153 deals from 132. Deal value, on the other hand, essentially stayed the same, declining by 1% to just over US$6 billion in 2016. More interestingly, there was only one deal in 2016 that was valued at over US$1 billion, and several deals that were greater than or equal to US$500 million. These numbers underscore how difficult it was to get deals done in a challenging macroeconomic environment and illustrate a shift away from the mega deals we saw during the last cycle. This year we expect to see a higher volume of deals but similar values. In other words, we’ll see smaller deals, but more of them.
Gold continued to rule the commodity space last year – nine out of Canada’s top ten deals were in gold. We also know that Canadian mining companies were looking to diversify their portfolios. Half of all deals last year were done to diversify either geographically or from a commodities perspective. And most deals were business acquisitions or combinations, instead of the predicted divestment boom. Only one out of the top 10 deals in Canada was a divestment last year.
Increase in transactions
If commodity prices continue to consolidate in 2017 as has been predicted, they will improve the sector outlook and strengthen investor confidence. As a result, there will be more and better options for access to capital and mining companies will start looking to invest in long-term capital expenditure projects again.
With higher confidence and more activity, transaction volume will increase as the valuation gap between buyers and sellers will close. Companies that strengthened their balance sheets may consider strategic acquisitions to bolster their portfolios. Mid-tier companies may opt to consolidate, in an effort to become major players in their respective commodities at the peak of the next cycle.
The only exception could be the Chinese domestic producers, where large-scale consolidation could happen this year.
Despite the renewed optimism, we expect investors to be cautious, shying away from mega deals in favour of smaller transactions.
What’s a miner to do?
Mining companies need to optimize their capital structure and regularly evaluate their portfolio of assets to facilitate better capital allocation decisions.
Securing the proper form of financing for existing projects and for acquisitions will be critical to their long-term health and success.
As debt and equity markets rally, companies will need to think about how to best combine traditional financing options with some of the alternatives that have gained traction over the past few years. The right capital structure will help companies execute successful projects and fund growth opportunities.
Having the right portfolio of assets is a critical success factor. Mining companies need to perform rigorous and regular portfolio reviews to ensure that assets continue to align with the overall strategy of the organization and to allow for proper capital allocation decisions. Adopting a best in class portfolio review strategy is one way for mining companies to ensure they have the right asset mix to weather any storms ahead.
MICHELLE GRANT is BC Mining and Metals Transactions Leader at EY.