By Alex MacDonald and Rhiannon Hoyle
Mining and metals companies are growing more confident about the
global economic outlook but remain cautious about mergers and
acquisitions, said consultancy and accounting firm Ernst &
Young in a series of reports Thursday.
Out of 193 mining and metals executives surveyed by Ernst &
Young from different companies around the world, 57% said they
think the global economy is improving compared with 21% in October
2012. Meanwhile 44% of respondents said they are now focused on
growth, up from 38% in October, and 46% of respondents said they
view credit availability as improving, up from 30% in October.
Nevertheless, M&A appetite remains subdued, with only 24% of
respondents planning to make a purchase in the next 12 months, down
from 28% in October. The cautious approach to mergers and
acquisitions is also reflected in Ernst & Young's first quarter
M&A figures. Total global mining and metals deals fell 45% on
year, to $16.3 billion in the first quarter, while deal volume
dropped 35% on the year to 168 deals in the first quarter.
"Companies are pausing for breath right now, they are focusing
on optimizing their operational and capital base," said Lee
Downham, Ernst & Young's Global Mining & Metals
Transactions Advisory Leader. "For those where M&A is still a
priority, smaller bolt-on acquisitions are preferred [but for the
most part]...Companies are instead opting for lower risk organic
growth, optimizing capital allocation, and strategic divestments,"
he said.
On the M&A front, gold was the most targeted commodity in
the first quarter, accounting for 42% of the global deal value, or
$6.88 billion, followed by titanium, silver, lead and zinc.
In terms of geography, Europe was the most active by deal value
from acquiring region, accounting for $5.16 billion, or 32%, of the
total. North America was next, with 29%, and Asia Pacific was
third, with 27% of the total deal value. The majority of the deals
were cross-border, Ernst & Young said.
Deals in key mining jurisdictions like Australia have slowed as
companies, battered in the share market by unimpressed investors,
shy away from potentially risky asset purchases and target better
returns to shareholders.
Still, large resources companies have been increasingly planting
for-sale signs on their Australian assets in recent months in a bid
to trim their portfolios down to only their most profitable assets
and bolster their balance sheets.
Mr. Downham said asset disposals or stake sales will remain a
key priority for large producers in coming years, with 43% of
respondents polled in Ernst & Young's Global Corporate
Divestment study saying they plan to launch divestment programs
over the next two years.
"This will present buying opportunities, most likely for those
with access to private capital," he said.
A raft of former mining CEOs and senior investment bankers are
setting up or have set up their own investment funds to buy mines
in the current depressed market environment. Xstrata CEO Mick Davis
has hired Goldman Sachs Group Inc (GS) to raise billions of dollars
to buy mines while Roger Agnelli, former CEO of Brazilian miner
Vale (VALE, VALE5.BR) is already scooping up mining assets through
its venture B&A Mineracao.
Rio Tinto PLC (RIO, RIO.LN) has led the pack in accelerating
plans to sell billions of dollars of noncore assets, appointing
banks to find buyers for parts of its business like its 57% Ivanhoe
Australia Ltd. stake and its 59% stake in Iron Ore Company of
Canada. It has also put several mines, like its Northparkes
copper-and-gold operation and Blair Athol thermal-coal mine, both
in Australia, up for sale.
Rival BHP Billiton Ltd. (BHP, BHP.AU) is following a similar
path, having singled out 10 noncore businesses it could exit to cut
costs.
More gold assets are also up for grabs. Barrick Gold Corp. (ABX,
ABX.T), the world's largest gold miner by output, is currently
seeking a buyer for three Australian gold mines. The Darlot, Granny
Smith and Lawlers mines in the Australian Outback account for about
one-third of its production in the country.
More broadly across the region, Asia Pacific was a big target
for mining and metals deals in the first quarter. Some $5.07
billion worth of deals were done in the region during the three
month period, making it the second largest target for M&A after
the Commonwealth of Independent States, which attracted the largest
amount of deal activity, $6.6 billion, or 40% of the total deal
value.
In terms of capital raising, the total amount raised in the
first quarter amounted to $91.8 billion from 633 issues, driven
largely by a number of large loans, the consultancy firm said. This
compares with $67.3 billion raised from 725 issues in the same
quarter a year ago.
Ernst & Young said 73 loans raised $56 billion in the first
quarter, while 44 bond issues raised $8.9 billion and 26
convertible bonds raised $4.8 billion during the same period.
Initial Public Offerings raised the least amount of money, with six
IPOs accruing $451 million during the quarter.
Write to Alex MacDonald at alex.macdonald@dowjones.com