Transactions in the global mining and metals industry — and Canada —continued to decline off the back of a seven-year low in volumes in 2013, according to an EY report.
“Deal volume in the Canadian mining and metals sector fell 33% year-over-year despite a variety of market forces setting the stage for transaction opportunities,” says Bruce Sprague, EY’s Canadian Mining and Metals leader.
Extreme price volatility and rapid changes to the global economy that defined 2012 persisted through 2013. Year-end reporting announcements were littered with headlines of impairments and recriminations that forced changes in strategy and senior management across the industry.
“These developments created too great a risk for many companies considering transactions, especially given the moving base on which decisions needed to be made,” adds Sprague.
Acquisition plans became difficult to support and as a result few deals were pursued. Divestment plans were also scaled back as it became clear price expectations between buyer and seller could not be met. Deals that were done were largely smaller low-risk acquisitions fueled by a desire to increase an existing stake, achieve domestic or inter-regional consolidation and secure future supply.
Activity was also driven by financial investors who were attracted to the sector by the prospect of strong returns from low asset valuations. This group increased their share of total M&A value from 5% in 2012 to 19% in 2013 — a trend that’s set to continue throughout 2014.
“Financial investors and equity-backed alternative capital providers, driven by anticipated longer term commodity price recovery and the ability to leverage management ability, are set to lead transaction activity across the sector in the year ahead,” says Sprague.
Expect a better environment for both deal making and capital raising in the sector as confidence in the global economy continues to improve, larger companies experience stronger balance sheets, and the focus on productivity and efficiency yields margin improvements.