According to a recently released report by EY, financial distress among mining and metals companies will shape M&A activity in the sector in 2016. Furthermore, divestments are expected to pick up pace on the back of volatility and uncertainty on the timing of a recovery. Wickus Botha (pictured), EY Africa Mining & Metals Sector Leader, said:
"A company's positioning on the cost curve is critical in the current market conditions, so presenting robust information to potential buyers is pivotal in order to provide confidence that cost reduction and productivity measures are sustainable. Similarly, anticipating transaction risks such as separation and regulatory and joint venture approvals take on greater importance in this market. Prospective buyers are thin on the ground and they will reduce valuation, or even walk away, if these issues aren't adequately addressed."
The report, entitled 'A new normal, or the bottom of the cycle? Mergers, acquisitions and capital raising in mining and metals, 2015 trends and 2016 outlook' notes that after the fifth consecutive year of declining deal volume and values, increasing levels of financial distress will trigger more divestments, spin-offs, joint ventures and possibly hostile takeover bids.
Overall, mining and metals deal volumes globally in 2015 sank to the lowest level since at least 2000, with just 358 deals completed. Botha said that perhaps the greatest concern within the industry is that nobody is sure how long the current downturn is going to persist. "Companies cannot sit back and wait for an improvement in market conditions. This is forcing many corporates to downsize portfolios, and be pragmatic on valuation, which in turn will create deal activity," he said.
The report further cautions that with a surplus of assets, scarcity of capital, selective buyers and market conditions forcing accelerated sales, getting divestment processes right will be crucially important to achieving sales; this for even the best quality assets.
Botha says it is likely that there will be increased ownership changes across the sector in 2016, with new players taking on positions and larger players downsizing portfolios. "Due to the current market conditions, we could start to see an increase in financial backing by potential investors in junior miners. This would afford them to enhance and build their portfolios," he said.
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