Accounting firm Ernst & Young has delivered a bleak assessment of the mining and metals sector, which it says is showing signs of being ‘lower for longer’ than previously thought.
EY Oceania mining and metals transaction leader Paul Murphy says 2016’s first quarter M&A and capital raising numbers reflect the stark reality of the market.
“Financial distress, particularly in the US coal industry, continues to weigh on many companies across the mining and metals industry and it’s playing out in the form of portfolio realignment and divestments to raise capital,” Murphy said.
Global deal value in the sector fell 45% to US$3.3 billion in the first three months of 2016, compared to the same period in 2015, according to EY’s figures.
72 deals in the first three months of 2016 compared to 90 in the last three months of 2015.
Murphy says the numbers tell a similar story in Australia, where the overall value of capital raising in the sector was just US$931 million in the first three months, down 58% year-on-year.
Just 17 deals occurred in the quarter in Australia, and overall deal value was US$1.4 billion, with two deals (the US$606m Bengalla Coal transaction and US$775 G-Resources Group transaction) accounting for all but 3% of total value.
Murphy believes private capital activity is a sign that mining deals could be about to pick up, though.
“Cash and sustaining costs continue to be the focus for most players in the sector, and while well capitalised miners will continue to consider acquisition opportunities, we are now starting to see the much anticipated foray of private capital into the sector,” he said.
“Private capital activity is most certainly a lead indicator for growing deal activity. If they are seeing value it is a sign that the deal cycle will begin to pick up.”
The tough market, and increasing interest from the financial sector, will mean sellers will have to have a sharper focus on their own preparation, Murphy explained.
“Sellers must be able to tell a credible and compelling value story to attract and retain buyer interest,” he said.
“They need to prepare more and sharpen their sales skills if they want to secure a deal and secure the best outcome for shareholders.”
Murphy expects divestment programs in Australia to pick up over the coming months.