Vancouver—Escalating capital costs and softening prices are causing mining and metals companies to rethink investment decisions, particularly when it comes to deals, according to a new Ernst & Young report.
The report, Mergers, acquisitions and capital raising in the mining and metals sector—1H 2012, found there were 470 global mining and metals deals with a total deal value of $55.7-billion between January and June 2012.
According to the advisory firm, those numbers were down 19 per cent in value and 38 per cent in volume compared to the same period in 2011.
“Global economic uncertainty and market volatility subdued deal value and volume in (the first half) 2012 in Canada and abroad,” Ernst & Young’s transaction advisory services practice partner Richard Crosson said in a statement. “In the first six months of 2012 deal value and volume in Canada fell by 41 per cent (in volume) and 26 per cent (in value) year over year.”
Increased activity in June points to a return in mining and metals M&A momentum, according to the report, with deals totalling more than $10-billion completed and an increase in 1H 2012 volumes over 2H 2011.
Strong balance sheets among producing companies, favourable long-term fundamentals and lower valuations are creating an attractive environment for opportunistic M&A.
“We’re already seeing mining and metals companies take advantage of recent changes in market conditions with synergistic deals,” Crosson said. “So far this year we’ve seen 20 megadeals of $1-billion in value or greater completed, up from 15 in the same period last year.”
Crosson said he expects to see an increase in mining and metals deal activity around the world in the coming months.
M&A opportunities available to well-capitalized buyers may spark a shift in capital allocation strategies from build to buy, but prudent buyers will have to invest significant time and resources in deal qualification, due diligence and negotiation to find, access and close on quality opportunities.
Beyond market volatility and geo-political uncertainty, buyers will also need to pay particular attention to key business risks, including resource nationalism and skills shortages, the top two risks identified in Ernst & Young’s latest Business risks facing mining and metals report.