“The mining and metal sector is entering 2014 with a more positive outlook: confidence in the global economy is improving, companies have taken action to deleverage balance sheets and the industry-wide focus on productivity and efficiency should begin to yield results,” says consultancy EY.
In their report, EY mining analysts advised “…we expect the gradual strengthening of mining and metals equity valuations to continue and the increased availability of capital.”
Nevertheless, the analysts cautioned, “As supply and demand struggle to return to post-supercycle equilibrium, we expect further price volatility to occur for at least the next two years. This will see caution prevail: any uplift in M&A activity and improvement of capital raising conditions will be gradual and will require innovation in pricing to tame volatility.”
“We expect growth in M&A activity during the first half of the year to be driven by financial investors and equity-backed alternative capital providers,” they advised. “This growth will not only be driven by anticipated longer term commodity price recovery but also by the application of in-house technical experience to drive operational, technical and financial influence.”
“With low levels of new capital and new investment, the mining sector may well be sowing the seeds for the next boom as supply falls short of demand,” EY suggested.
Nonetheless, last year the mining industry experienced the lowest number of deals since 2007 and the lowest global deal value since 2009, said the report, with the total number of deals down 25% to 702, with a total deal value of $124.7 billion. Only 19 of those deals exceeded $1 billion, compared to 26 such deals in 2012.
IPO volume reached a low of 26 across global exchanges for a 70% decline, the lowest number of IPOs in at least a decade, EY observed.
While 2013 deal activity was down, copper was still one of the most sought-after commodities last year, said the report. Gold was the target of 34% of deals by volume, making it the most sought-after commodity in merger and acquisitions last year.
EY Global Mining & Metals Transactions Leader, Lee Downham said the third quarter of 2013 is widely viewed as the bottom of the market.
Meanwhile risk capital for early-stage exploration companies “is unlikely to be available on a large scale in 2014, but there is an increasingly large pool of family offices, private equity providers and venture capitals that provide early-stage seed funding, often linked to certain conditions and achievement of project milestones,” the report noted.