Sluggish merger and acquisition activity in the mining sector is set in for the medium term, with mining majors more likely to shed assets then add them to their swag, PwC global mining leader John Gravelle says.
Releasing its Mining Deals report, PwC claims M&A activity in the mining sector has dropped off by about 31 per cent for the first half of 2013 compared to the same time last year.
The January to June period saw just 649 deals completed, prompting the professional services company to attribute the lacklustre result to falling confidence levels fuelled by a wash of write-downs, market uncertainty, and tumbling commodity prices.
“There’s been a confidence crisis with big mining companies because they haven’t been able to deliver the levels of profitability shareholders have grown used to in recent years, even after the global finance crisis,” Gravelle said.
“The substantial write offs we’ve seen from many of the big producers around the world have caused investors to leave the market and moveon to other things.”
He explained market volatility has had a noticeable impact on M&A activity this year, saying while some miners have taken advantage of lower prices, picking up bargains, the value of M&A deals declining approximately 74 per cent to $20.6 billion when Glencore purchased Xstrata for $US54 billion is included, the PwC report found.
Taking out the Glencore deal, values dropped 21 per cent year-on-year, Business Spectator reports.
But the biggest challenge in the current M&A mining market is finding buyers, with juniors noticing the amount of takeovers has dropped off as majors move to curb capital expenditure, PwC said.
“Majors are mostly looking to divest assets, not pick up more,” the company said.
PwC Australia’s mining leader Jock O’Callaghan said deals are also taking longer to finalise with alternative investment options like joint ventures being favoured over traditional takeovers.
"Deals that may have taken three months to come to a landing are now taking six to 12 months," he said.
"Assets that may have taken up to a year to find a new home may now sit in limbo for years.”
According to the report, a number of top tier miners have also changed tack this year, switching from buyers to sellers in a bid to reduce debt, raise capital, and improve balance sheets as well as investor returns.
In July Australian Mining reported Rio Tinto sold its 80 per cent stake in the Northparkes copper mine to China Molybdenum for $US820 million ($AUD892.37 million).
“Traditional takeovers of entire companies are taking a back seat to joint ventures and spin-offs. Expect more of these non-traditional and creative deals to round out M&A activity during the second half of 2013,” Gravelle said.
The PwC report highlights mining bosses are also increasingly re-evaluating what constitutes a core asset.
In a statement Rio at the time explained the Northparkes mine was not big enough to be a good fit with the company going forward.
“They will need to concentrate on the projects they have and operate them with a focus on the bottom line,” Gravelle said.
Of the M&A activity that has taken place in the past year, PwC’s report finds gold and copper accounted for almost half of all transactions both by value and volume.
For the first half of 2013 gold represented about 36 per cent of all transactions, compared to the 26 per cent it accounted for in the same period last year.
Copper however made up 12 per cent of deals by value, dropping from 23 per cent it achieved in 2012.
“Gold and copper continue to be the most active buyers and sellers in the first half of 2013, a trend that is expected to continue as depressed prices create opportunities for those who can afford to buy,” Gravelle said.