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.
Richard Crosson, partner in Ernst & Young's transaction advisory services practice, said, "Global economic uncertainty and market volatility subdued deal value and volume in [the first half of 2012] in Canada and abroad."
"In the first six months of 2012 deal value and volume in Canada fell by 41% and 26% [respectively] year over year."
Mergers, acquisitions and capital raising in the mining and metals sector — 1H 2012 revealed there were 470 global mining and metals deals with a total deal value of US$55.7 billion between January and June 2012, down 19% in value and 38% in volume on the same period in 2011.
Increased activity in June pointed to a return in mining and metals M&A momentum, with completed deals totalling more than US$10 billion and an increase in volumes over the second half of 2011.
The report said 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," said Crosson.
"So far this year we've seen 20 megadeals – of US$1 billion in value or greater – completed, up from 15 in the same period last year."
Crosson said the sector should expect 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, he said.
Beyond market volatility and geo-political uncertainty, Crosson said 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.
