The better the question. The better the answer. The better the world works. У вас есть вопрос? У нас есть ответ. Решая сложные задачи бизнеса, мы улучшаем мир. У вас є запитання? У нас є відповідь. Вирішуючи складні завдання бізнесу, ми змінюємо світ на краще. Meilleure la question, meilleure la réponse. Pour un monde meilleur. 問題越好。答案越好。商業世界越美好。 问题越好。答案越好。商业世界越美好。

In a diverging market, what path will you carve?

Mergers, acquisitions and capital raising in mining and metals

3Q17 trends and 2017 outlook

M&A activity has improved in 2017, with some signs of a shift from largely divestment-led drivers to strategic-led deals focussed on growth.

Global aggregate capital raised increased by 8% year-on-year to US$66b in 3Q17, a drop from the record US$83b raised in 2Q17. Activity remained distributed across several geographic regions but China’s share increased to 41% of the capital raised from 25% in the previous quarter.

M&A trends and outlook

M&A activity has improved in 2017, with some signs of a shift from largely divestment-led drivers to strategic-led deals focused on growth. The value of transactions increased by 68% year-on-year (y-o-y) over the first nine months of 2017 compared to the same period in 2016. Although there was a quarter-on-quarter (q-o-q) drop in deal value in 3Q17 (down 42% to US$9.4b), deal activity overall remains buoyant, with transactions involving Australia, Canada and China particularly strong.

A slow return to growth is reflected by activity being dominated by mining and metals corporates, which accounted for US$8b of investment (86%) in 3Q17 (compared to 61% in 2Q17), with limited attention from financial investors or other sector acquirers looking to enter the mining market.

Similarly, deals targeting established mining regions in Australia and North America comprised 60% of the volume of deals undertaken in the third quarter. Interest in mineral exploration assets in these areas has increased from just five in 9M16, to 25 in 9M17, partly to enable producers to replenish project pipelines that have suffered as a result of exploration budget cuts in recent years.

Although divestment and restructuring activity has eased, the exception remains for coal and steel. Rio Tinto concluded the sale of Coal & Allied to Yancoal during 3Q17, one of the largest deals so far this year.1 Also completed was the sale of ThyssenKrupp’s CSA Siderúrgica do Atlântico to Ternium, signaling the company’s exit from South America and an ongoing strategic attempt to minimize exposure to steel.2

EY - Mergers and acquisitions - value and volume: (2010-3Q17)

EY - Value of deals by target commodity 3Q17 (US$b)

Outlook

We expect steady deal activity through the remainder of 2017, with no transformational deals likely outside of anticipated coal divestments and steel mergers. ThyssenKrupp and Tata Steel recently confirmed an intention to combine their European businesses (not expected to be completed until 2018).3 Across the sector, consolidative deals to seek economies of scale and unlock value through synergies will also be fueled by a growing level of activist intervention and a rise in capital being earmarked for investment.

Capital raising trends and outlook

Global aggregate capital raised increased by 8% y-o-y to US$66b in 3Q17, a drop from the record US$83b raised in 2Q17. Activity remained distributed across several geographic regions, but China’s share increased to 41% of the capital raised from 25% in the previous quarter. There has generally been less appetite for debt instruments with more emphasis on equity issuance, reflecting the reduction in leverage across the sector.

EY - Capital raised - value and volume (2011-3Q17)

EY - Capital raised by asset class - proceeds (US$b) Five-year trend

During 3Q17, there was a hint of a shift to growth with sector players now executing growth projects. Around 12% of loans were allocated for capital expenditures, which is a major shift from previous quarters. However, the bulk of the proceeds continue to be utilized for working capital and refinancing purposes.

Miners have greater flexibility regarding use of capital-raising instruments due to stronger balance sheets. Buoyant commodity prices have driven stronger equity prices, making it easier for miners to issue equity. Indeed, 3Q17 saw increased activity in equity markets. Follow-on equity more than doubled q-o-q to US$12.5b, up 66% y-o-y. China, Australia, Canada and Indonesia accounted for almost three-quarters of the transactions, with the focus mainly on coal, gold and iron ore. The perceived limited upside potential for certain metals, particularly bulk commodities, could also have influenced the decision to issue more equity as potential for dilution has eased.

EY - Capital raised by asset class - proceeds (US$b) Quarter-on-quarter trend

Outlook

As the switch to growth gains momentum, appetite to raise more capital in the sector is expected to grow. While issuing more equity will remain an attractive option, increasingly, industry participants will also consider the efficiency of their overall capital structure. The bias toward equity funding, which is more expensive than debt, is increasing the sector’s weighted average cost of capital. The focus on lowering financial risk will ease going forward, with activity in debt markets picking up once again.


1 “Rio Tinto completes divestment of Coal & Allied Industries Limited for $2.69 billion,” Rio Tinto Press Release, 1 September 2017.

2 “Sale of Brazilian steel mill CSA complete,” ThyssenKrupp Press Release, 7 September 2017.

3 “ThyssenKrupp and Tata Steel plan to create powerful new No. 2 in European steel market,” ThyssenKrupp Press Release, 20 September 2017.