Mergers and acquisitions (M&A) in the mining sector should double in value this year compared to 2013, were deal volumes fell short of $90 billion, according to a new report by Grant Thornton.
“After a slow 2013 and Q1 2014, the signs in our survey and the market point to an increase in the value of mining M&A deals in the rest of 2014 and 2015,” the accounting and business advisory firm writes in its November report titled Gathering Momentum.
The study attributes the resurgence of M&A activity to four factors, identified through feedback from over 250 senior mining executives worldwide, representing 79 major/other mining respondents and 180 junior miners.
The financial downturn has been tough for miners, particularly for junior explorers, with hundreds of firms still struggling to keep the lights on.
Accordingly, a tenth of juniors are likely to enter administration and a quarter of majors expect difficultly with their financial covenants within a year. Given the bleak reality, the market should expect more than usual “distressed assets and low valuations” leading to more M&A activity.
Second, it notes a third of the study participants said they are likely to make an acquisition (35% juniors and 32% majors) for a company or unit of another company by year-end. Third, the same amount said they expect to be sold or undergo a partial sale (36% juniors and 27% major/other miners).
“This matchmaking balance between buyers and sellers underscores the likelihood of substantial M&A. But there are probably more junior opportunities out there than there are willing and capable buyers, which will lead to choosey acquirers,” the study notes.
Combined with weaker commodity prices — another driver for potential M&A activity — this would push down deal values, as vendors jostle to attract a potential buyer.
“So there is plenty of opportunity for doing deals, especially for those looking to seize opportunities with distressed sellers ahead of any improvement in the metals market” mining industry leader for Grant Thornton Canada Jeremy Jagt said in a release.
In addition to those four factors, the report says it helps that private equity firms have raised US$8 billion and are looking for mining investment opportunities, given the lack of financing options available for junior explorations firms.
It adds that 59% of the juniors surveyed said they would need to raise capital in the next year, and a third of them as a result are seeking a corporate transaction or merger.
“What we’re also seeing in the market, adding to this demand, is the return of private equity interest,” Jagt continued. “If these appetites [including that of Chinese investors’] persist, I think the value of transactions for 2014 will be double that of the previous year.”