Difficult to price assets
Mining companies are buying fewer operations that require large capital investment
Last week’s expiry of the deadline for Blackspear Capital to buy the Mooiplaats Colliery from Coal of Africa was the latest of a series of asset disposals in the mining sector that have taken far longer than expected — or didn’t ever happen.
The reason that some disposals are concluded with relative ease, even in the current environment of pinched balance sheets and volatile commodities prices, and others prove difficult, can reflect not only the quality of the asset and the liquidity of the buyer but occasionally even the personalities involved. Some CEs and boards of directors are more flexible in negotiations than others.
SNL Metals & Mining says in its “signs of life in mining acquisitions” report that only 24 deals were recorded across the globe in the March quarter (from 43 in the December quarter) while fundraisings fell to US$10bn, from $15bn. But it says the value of 73 individual deals last year was substantially more than in 2013, mainly reflecting the acquisition of copper assets, even though the total value of deals was the third lowest of the past decade.
“For the past few years, mining companies have been cau- tious with regard to acquisitions, and since 2012 have bought fewer assets that require large capital investment,” SNL says in its report. “Instead, companies have opted to maximise the value of assets they already own, and to enter joint ventures that reduce costs while at least maintaining production.”
EY’s first-quarter 2015 scorecard for international mining mergers and acquisitions and capital raisings showed the value and volume of deals has fallen steadily since the first quarter of 2012.
Deal value dropped 18% in the three months to March 2015 from the same quarter last year and by a third from the December 2012 quarter. The volume of deals has almost halved, year on year, to 79.
Last year’s mergers and acquisition activity was the lowest for a decade, EY says. As commodities prices remain volatile, mining executives’ confidence in the outlook for earnings has been dented. Cost reduction and margin improvement is the core focus, not growth. Dealmaking is expected to be reined in by a substantial valuation gap between buyers and sellers, limited access to funding and increased competition among buyers for certain assets.
EY’s survey of executives showed 49% expected to pursue an acquisition in the next year. It said most of the deal activity was sales of distressed assets in the gold and coal sectors. Companies in iron ore and coal were the most under pressure but there was a wider need for restructuring to release capital.
Investec’s latest report on the global outlook for the mining sector said that the coal and platinum group metals sectors were at most risk of restructuring. If spot prices weakened further, difficult decisions might have to be made, like closing or selling assets, analyst Hunter Hillcoat says.
“A positive signal to look out for is the deployment of private equity capital that currently remains surprisingly subdued,” Hillcoat says. (See Cover Story on page 21).
“We note that X2 (Resources — the private equity company headed by former Xstrata CE Mick Davis) has yet to undertake a major transaction, while some of its competitors face challenges around financing as backers seek to deploy capital elsewhere.”
Hillcoat said Glencore, on which Investec has a buy recommendation, is the most likely of its peers to undertake a deal to deliver value, as the company had more of a trading-orientated approach.
Anglo American CE Mark Cutifani announced more than a year ago that the group intended to sell noncore platinum assets, including Rustenburg and Union mines. Plan B was to list them separately. So far there are no indications that a buyer has been found nor has there been an announcement on a listing. Cutifani has also said Anglo American has been seeking buyers for some of its interests in SA coal mines for the past couple of years. But there has been no transaction in that division, either.
BHP Billiton was rumoured for several years to be looking for a way to exit its SA coal mines and earlier this year included them with other shorter life assets in the separate listing of South32.
The Anglo American and Billiton SA coal mines, though far bigger than Coal of Africa’s Mooiplaats, are in a similar position: they need money spent on them at a time when capital is