By Esmarie Swanepoel
August 5, 2018 - Global merger and acquisition (M&A) transaction values in the mining and metals sector fell by 9.5% year-on-year in the second quarter of 2018, advisory firm Ernst & Young (EY) reported this week.
In its latest quarterly data, the company noted that while deal value in the first half of 2018 was up 36% year-on-year, this was largely owing to the $18-billion merger between PotashCorp and Agrium completed in the first quarter of 2018, which represented 45% of the first half of 2018’s deal value.
“Mining and metals companies remain conservative in their approach to deals, despite a return to stronger balance sheets. There is still significant caution being exercised in the allocation of capital to anything other than the most attractive and low-risk projects,” EY global mining and metals transaction leader Lee Downham said.
“Portfolio optimization remains a key focus, and investment into growing the pipeline of future production appears to be back on the agenda but not at the risk of stressing balance sheets. There is no sign that this caution will reverse as we see out 2018, and we anticipate this will be a year of expansion primarily through organic investment rather than one of seeking long-term acquisitive growth.”
Downham said that corporates increasingly drove the deal-making agenda in the first half of 2018, reflected by a wider geographical spread of M&A beyond China, which has been the epicenter of mining M&A in recent quarters.
China’s share of deal value fell from 16% at the end of the first quarter to 14%, or $5.8-billion overall in the first half of 2018, while Canada, at $19.7-billion, and India, at $6.3-billion, collectively accounted for 64% of deal value during the first half of the year.
EY’s data indicate that despite sluggish M&A activity overall, battery metals deal activity has begun to accelerate.
Deal value for rare earth/lithium assets was up 22% year-on-year in the first half of 2018, as companies increasingly look to capitalise on the future demand for electric vehicles. Meanwhile, steel, coal and gold transactions continued to dominate, representing 62.5% of the deals in the second quarter of 2018.
“Mining and metals companies are increasingly excited by the potential of minerals supply into battery technology, which may encourage acquisitions and investment into earlier-stage assets. To date, we haven’t seen many big players moving into this space, and it will be interesting to see whether companies will be bold enough to respond to the rise in adoption of battery technology,” Downham said.
He noted that with businesses maintaining their focus on short-term projects, capital-raising activity remained slow during the second quarter.
Global aggregate capital raised decreased by 3% to $131-billion in the first half of 2018, while the second quarter volume was just 6% higher than the previous quarter, at 651 deals.
Debt proceeds remained unchanged year-on-year at $122-billion in the first half, but equity proceeds fell by 29%, primarily owing to a fall in the number of initial public offerings to just seven in the second quarter, the fewest listed since the fourth quarter of 2016.
“Balance sheets are typically well capitalized across the sector, but continued capital discipline has resulted in companies focusing on optionality across existing projects and delaying execution of higher-risk capital investments,” Downham said.
“This is not a long-term sustainable strategy across the industry, and we expect supply deficits to reignite capital-raising activity into 2019. In this ever-changing landscape, doing nothing is not an option.”