Only 24% of global mining and metals companies are focused on M&A in the next six months, says a new report released by Ernst & Young on Tuesday.
This despite the fact that 57% of companies — up from 21% in October — view the economy as improving, the report 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.”
In the latter half of the year, 91% of deals 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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