Companies careful to balance cost management with strategic deal making
TORONTO, May 15, 2014 /CNW/ - Canadian mining and metals deal volume and value fell year-over-year in the first quarter of 2014. Still, the results are a modest improvement over Q4 2013, according to EY's tenth semi-annual Capital Confidence Barometer.
"Low first quarter deal numbers actually mask growing confidence across the sector," says Bruce Sprague, EY's Canadian Mining and Metals Leader. "Deal value may have fallen 51%, and volume 13%, in Q1 over 2013, but we've already seen increased desire to do deals in Canada. Transaction activity will come down to whether companies with an eye on M&A can find the right opportunity."
The growth for growth's sake mentality is far from returning to the sector, cautions Sprague.
"Companies pursuing transactions are looking for lower risk deals that strengthen their positions in existing markets," says Sprague. "Only 24% of global mining and metals companies have short-term plans to undertake transformational M&A. Cost management is still top of mind."
Thirty-six percent of survey respondents consider productivity and cost reduction their primary focus.
"Striking a balance between risk and reward has become extremely difficult in today's uncertain economy — particularly in the mining and metals sector where one wrong step can cause hefty damage," says Sprague. "Executives are navigating these challenges by balancing cost management, including optimizing cost structures to drive greater margin improvements, with measured deal making."
Executives are also confident that what appeared to be a seemingly unbridgeable buyer/seller valuation gap is now closing. Forty-five percent of respondents believe the valuation gap to be less than 10%, up from 21% six months ago, and 80% expect it to remain at this level or decrease in the next six months.
"We expect deal volumes to build slowly through the rest of 2014 and into 2015," says Sprague. "Portfolio optimization among larger miners, financial buyers, and consolidation among juniors and mid-tier companies will drive deals. It's going to be an interesting year."
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SOURCE: EY (Ernst & Young)