Australia’s mining industry can expect an increase in mergers and acquisitions (M&A) this year, especially in the coal and gold sectors, according to Herbert Smith Freehills.
The professional services firm believes the 2016 rally in commodity prices, lower production costs and the Australian dollar have lifted confidence in the mining sector, which is likely to act as a catalyst for M&A in 2017.
“We anticipate more M&A activity as miners, having achieved significant cost and debt reductions and having improved profitability (and in some cases being net cash), refocus on their growth plans,” Herbert Smith Freehills outlined in its annual Asia Pacific M&A report.
“Confidence levels in long-term pricing have improved but volatility is still a consideration, particularly in bulk commodities. We therefore expect that at least in the short term, this will drive miners to prefer growth through acquisitions of existing operations rather than organic growth through developing new operations.”
Herbert Smith Freehills expects continued M&A activity in coal and gold, as well as increasing activity in copper and bauxite as buyers will be looking to gain exposure at current prices.
“The challenge in consummating deals will be achieving a match on price expectations in an improving commodity price environment,” it stated.
In 2016, there was a decline in the value of reported M&A activity in the mining industry, according to Herbert Smith Freehills, with the value of public deals down by a third compared to 2015.
Despite the decrease in deal value, there was a 25 per cent increase in the number of mining deals announced in 2016 compared with 2015. Most of the deals were announced in the second half of 2016.
“In 2016, mining M&A transactions fell into three categories,” Herbert Smith Freehills reported.
“First, major miners divesting assets, particularly metallurgical and thermal coal assets, via private M&A auction processes. Secondly, sales of mid or small size operating gold and/or copper assets. Thirdly, sales of exploration assets or undeveloped mining leases (particularly in metallurgical coal).”
The significant increase in metallurgical coal prices in the second half of 2016 adversely affected the ability to complete large scale M&A transactions, Herbert Smith Freehills added.