EY’s review of mining M&A presents options for resource companies.
JOHANNESBURG – Is the mining Industry facing a crisis in confidence? As falling commodity prices eat away at earnings for the world’s largest miners, some investors (if not all) are focusing on how the industry will survive with its near-record levels of debt. And it’s looking quite ugly. Commodity prices, return on capital, finding ways of maintaining costs, these are just some of the issues keeping industry leaders up at night.
A key challenge in the mining industry is access to capital. In a recent report released by EY, mergers, acquisitions (M&A) and capital raising activity remained low over the first half of 2015, with the sector remaining largely focused on portfolio management instead of exploring other avenues for growth. Overall activity is 30% lower than the same period in 2014, dropping to $12.7 billion.
“I would say that M&A activity is not low because of a lack of effort, but the ability to fund those transactions is very, very low” said Wickus Botha, Head of Mining & Metals at EY.
For some of the majors who are sitting with a strong balance sheet, their dilemma is not knowing what to do with the capital.At these commodity prices, those who are playing the wait-and-see game rather than jumping in head first with regards to buying are creating opportunities for the juniors and mid-tier players.
“They are relishing the opportunity to buy some of these assets that the majors are disposing of, viewing them as good assets that would have been managed very well by the majors,” adds Botha.
As much as the mid-tiers see opportunity, their major problem is getting access to financing. With so many sources of funding such as venture capital and private equity, one may ask then, why are we not seeing as many deals? Market experts say there is a lot of interest in mining from a private equity point of view, but the challenge is that the private equity model is built quite differently.
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