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Canadian mining and metals deals plunged 51% in terms of value and 13% when it comes to volume in the first quarter of 2014, compared to the same period last year, reveals EY’s latest Capital Confidence Barometer, released Thursday.
Yet the results show a modest, but sustained improvement over the previous quarter, with confidence levels in the sector on their way up. According to EY’s study, 60% of the companies interviewed believe global deal volumes will soar in coming months.
This optimism, shows EY’s report, arises from increasingly stable global economics, particularly in mature markets, where GDP growth has largely returned.
“Low first quarter deal numbers actually mask growing confidence across the sector,” says Bruce Sprague, EY’s Canadian Mining and Metals Leader. “We’ve already seen increased desire to do deals in Canada [and] 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,” he says.
Currently only 24% of global mining and metals companies have short-term plans to undertake transformational M&A, as cost management is still top of mind: 36% of survey respondents consider productivity and cost reduction their primary focus, shows the report.
“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.
Management is navigating these challenges by balancing administration costs, including optimizing cost structures to drive greater margin improvements, with measured deal making. This, says the report, includes studying how best to improve shareholders returns, with many considering higher dividends and share buyback programs in the absence of investment opportunities acceptable to the market.
EY’s analysts expect deal volumes to build slowly through the rest of 2014 and into 2015, with portfolio optimization among larger miners, financial buyers, and consolidation among juniors and mid-tier companies driving transactions. “It’s going to be an interesting year,” concludes Sprague.
