Mergers and acquisitions in Australia’s mining sector have sunk to their lowest level in 10 years.
A new report out by EY shows deal value in Australia was $US4.7 billion in 2014, down from $US5.5 billion in 2015.
Deals for the year totalled 144, down from 178 in 2013 and are at their lowest level since 2003, the report said.
Worldwide, the story was not much better, with deal values falling to 10-year lows of $44.6 billion.
The results were somewhat surprising given the low commodity prices and distressed assets in the sector.
It was widely thought 2014 would be fuelled by deal activity with private equity firms looking to gain market share.
EY’s head of mining and metals Paul Murphy said that ongoing volatility and uncertainty would continue to keep investors at bay until price stability returned confidence.
Murphy said the current sector focus on return on capital lends itself to short-term decision making, some of which has successfully instilled much needed discipline across the industry.
However he said “standing still is not an option for the sector,” and expects 2015 to be a turning point for the return of private capital in mining.
"Acquisition options have often been taken off the table because of the significant impairments that have followed deals in recent years, and the stigma attached as a result," Murphy said.
"This overlooks the huge returns that some acquisitions created earlier in the cycle, and the short payback that a deal, if executed well, may generate overall compared to investing in a portfolio asset. Given the sector is now back to the lowly M&A levels of 10 years ago, the question is when to move, as the rule of thumb tells us that the early movers will create the most value."
EY also expects to see more strategic joint ventures emerge as a way of sharing the costs and risks associated with accessing new markets, to realise synergies, as well as among Asian acquirers looking to secure supply.
“There could also be a flurry of opportunistic buying as companies fall under the weight of widespread price volatility,” Murphy explained.
Innovative financing structures, shown to be successful by the US$7.2b funding package for the Roy Hill iron ore project which was completed last year, are also set to continue in 2015.
“Capital availability has become very selective and getting projects away requires increasingly sophisticated and innovative funding structures and sources,” Murphy said.
These are expected to include financing arrangements with commodity traders and specialist funds involving offtake agreements and streaming and royalty deals.