Organic growth, optimizing capital structure, strategic divestments top
VANCOUVER, May 14, 2013 /CNW/ - Only 24% of global mining and metals
companies are focused on M&A in the next six months, despite the fact
that 57% of companies view the economy as improving — up from 21% in
October, Ernst & Young's eighth semiannual Capital Confidence Barometer reveals.
"Confidence in the global economy is up but deals in the sector — and
the appetite to do them — are down as weaker commodity prices, cost
inflation and labour unrest take their toll," says Bruce Sprague, Ernst
& Young's Canadian mining and metals leader. "These forces have driven
companies to take drastic measures to reduce their operating costs,
including staff reductions and mine closures."
Total deal value fell 45% year-on-year to US$16.3b while deal volume
fell 35% to 168 deals in the first quarter of 2013. But while deals may
be off the boardroom agenda, growth is still top of mind for 44% of
mining and metals companies, adds Sprague.
"Companies are looking at how they can achieve growth from a stronger
operating base. They're opting for lower-risk organic growth,
optimizing capital allocation and strategic divestments rather than
M&A," explains Sprague. "For those where M&A is still a priority,
expect to see smaller, bolt-on acquisitions."
Ninety-one percent of deals in the latter half of the year are expected
to be below US$500m, up from 74% in October 2012, as companies take
care not to jeopardize balance sheet agility and credit ratings.
"Companies with the best approach to capital planning will come out on
top in the next investment cycle," says Sprague. "Opportunities will
always exist for those willing to take a long-term view of the sector.
It's about balancing cost reduction and operational efficiency efforts
with strategic transactions — especially during this time of depressed
valuations, which could provide attractive returns on deals."
The rising valuation gap and increase in divestment activity are
creating a buyer's market for non-traditional investors. More and more
private equity and sovereign wealth funds are entering the market,
securing supply and seeking financial return on undervalued assets.
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SOURCE: Ernst & Young
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