Distress and divestments to dominate mining deals in 2016

Canadian transactions in 2015 hit decade-long low

VANCOUVER, March 8, 2016 /CNW/ - According to a recent EY report, financial distress among mining and metals companies is expected to shape merger and acquisition (M&A) activity in the sector in 2016, with divestments picking-up pace on the back of volatility and uncertainty on the timing of a recovery.

"The value and volume of Canadian deals was at a 10 year low in 2015," says Bruce Sprague, EY's Canadian Mining & Metals Leader. "Anticipating transaction risks such as separation and regulatory and joint venture approvals becomes even more important in this market. Prospective buyers are thin on the ground and they will reduce valuation, or even walk away, if these issues aren't adequately addressed."

EY's report, A new normal, or the bottom of the cycle? Mergers, acquisitions and capital raising in mining and metals, 2015 trends and 2016 outlook, notes that after the fifth consecutive year of declining deal volume and values, increasing levels of financial distress will trigger more divestments, spin-offs, joint ventures and possibly hostile takeover bids.

The report warns that with a glut of assets, scarcity of capital, selective buyers and market conditions forcing accelerated sales, getting divestment processes right will be paramount to achieving a sale for even the best quality assets.

Sprague says: "It's uncertain how long the current downturn is going to persist – but companies can't sit back and wait for an improvement in market conditions. Many are already being forced to downsize portfolios, and be pragmatic on valuation, which, in turn, is spurring deal some new activity."

Key transaction trends to watch in 2016 include:

  • More deals will be completed by private capital, but only the best assets will attract their focus and pricing will remain disciplined.
  • Deferred consideration will grow in popularity due to limited buyers and extreme price uncertainty.
  • Spin-offs as a means to package and divest assets have increasingly been featured in boardroom discussions and will remain high on the strategic agenda, but the level of working capital required will see few actually completed.
  • Increasingly, mergers and joint ventures will be pursued, with the key focus on de-risking and preserving capital. The necessity to de-risk and preserve capital will drive deals to completion.
  • Ongoing price volatility could see hostile takeover bids from better capitalized entities, but only where the takeover target operates desirable, low-cost assets in stable jurisdictions.

About the report

A new normal, or the bottom of the cycle? Mergers, acquisitions and capital raising in mining and metals, 2015 trends and 2016 outlook, is based on analysis of 2015 deals and capital raisings completed by 31 December 2015. Data is primarily sourced from ThomsonONE and unless otherwise stated all values are in US dollars. A full copy of the report is available online at ey.com/mining.

About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

For more information, please visit ey.com/ca. Follow us on Twitter @EYCanada.

EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

SOURCE EY (Ernst & Young)

For further information: Leigh Kjekstad, leigh.kjekstad@ca.ey.com, 604 648 3807; Sasha Anopina, sasha.anopina@ca.ey.com, 416 943 2637; Julie Fournier, julie.fournier@ca.ey.com, 514 874 4308

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