The current macroeconomic environment in South Africa has seen deals in the local mining and metals sector decrease significantly, with only one material deal being recorded in during Q3 2014, according to EY.
The South African picture mirrors that of the global mining and metals sector, which has also seen fewer deals.
EY’s quarterly analysis shows 119 deals completed in Q3 2014 with total deal value of $16.2 billion. Deal volume was down 17% but total deal value was up 51% on Q2 2014, largely due to the completion of Glencore’s $7 billion divestment of Las Bambas.
EY Global Mining & Metals Transactions leader Lee Downham says, “Mining and metals transactions activity is in something of a holding pattern. Deal pipelines are still very strong but are moving slowly.”
Awaiting bottom of cycle
EY Africa Mining & Metals Transactions Leader Quintin Hobbs agrees, saying investors are adopting a holding pattern as they wait out the bottom of the cycle.
“In South Africa, the situation has been exacerbated by the difficult macroeconomic environment, however, the country does have a strong deal pipeline, which is expected to be driven in part by opportunistic acquisitions by private equity investors as the major mining companies spin off local assets, as well as by expected consolidation, particularly in platinum ” explains Hobbs.
“As has been the case through most of this year, we are seeing signs of momentum slowly building but there is little urgency to complete deals quickly.
“We expect future deals to lead to significant consolidation in the South African sector, particular in the platinum, gold and manganese sectors.”
Capital Confidence Barometer
The 83 mining and metals sector respondents to EY’s latest Capital Confidence Barometer also points to increasing M&A activity globally, with 46% of respondents expecting to pursue an acquisition in the next 12 months, nearly double that six months ago and the highest level in two years.
The Barometer shows mining and metals companies are also confident in key deal metrics, including the likelihood of closing acquisitions (60%, up from 26% six months ago); the quality of acquisition opportunities (60%, up from 34%), and; the number of acquisition opportunities (67%, up from 42%).
Q3 2014 global deals in mining and metals
- 119 deals in Q3, down 17% on Q2 2014 and down 34% on Q3 2013
- Q3 deal value $16.2 billion, up 51% on Q2 2014 and up 39% on Q3 2013
- South Africa’s sole deal accounted contributed only 1% to global deal volumes, versus four deals (2%) in Q2 with a value of $196.81 million (2%).
- January-September 2014 YTD 414 deals with total deal value $34.1 billion, versus 566 deals with total deal value $65.4 billion for the same period in 2013
- Assets in frontier markets accounted for 21% of cross-border deal value in Q3 2014, up from 3% in Q2 2014
- Copper assets accounted for nearly half (46%) of all Q3 2014 acquisitions by deal value
- Q3 2014 capital raising in mining and metals
- Total capital raising in Q3 2014 was $64.4 billion, down 29% on Q2 2014 but up 52% on the same period in 2013
- Refinancing, along with discounted rights issues in the coal, iron ore and steel sectors, accounted for a significant proportion of Q3 funding activity
- Five IPOs in Q3 2014 raised $49 million, with 12 IPOs in January-September 2014 YTD raising $1.3 billion
- An 81% increase in follow-on equity issues to $4.7 billion for Q3 2014 masked ongoing distress, with a number of significantly discounted rights issues made during the quarter
Weak corporate balance sheets
Hobbs says South Africa will continue to see capital raising as the major mining companies refinance debt and raise equity to strengthen weakened corporate balance sheets.
“A separate report by EY released in February, Mergers, acquisitions and capital raising in mining and metals: 2013 trends, 2014 outlook, forecasted that financial investors and equity-backed alternative capital providers would be particularly active in the M&A market,” notes Hobbs.
“That is expected to materialise, pointing to a new wave of resource-driven focus by these private equity firms,” he concludes.