Improved credit availability is set to drive momentum in the mining and metals sector in the year ahead, according to EY’s Capital Confidence Barometer: Mining & metals sector, published Wednesday.
The report reveals that confidence levels in the sector have improved dramatically over the last 12 months, reaching a two-year high.
This optimism, says EY’s report, arises from increasingly stable global economics, particularly in mature markets, where GDP growth has largely returned.
Currently 55% of mining companies are already focused on growth — compared to only 38% in 2012.
“Transactions in the mining and metals industry have dropped considerably over the last year as companies struggled with capital allocation and access to capital challenges,” says Bruce Sprague, EY’s Canadian mining and metals leader. “Deal volume and value have fallen 36.9% and 58.1%, respectively, year over year in Canada alone.”
Now it looks as the tide is turning, with 47% of the companies surveyed believing credit availability is improving in the sector — and 72% believe the global economy is improving compared to 57% only six months ago.
Investment decisions across the sector are currently focused on deploying low-risk capital for growth. EY expects miners to pursue mergers and acquisitions (M&A) that fit within their overall portfolio, rather than just to achieve scale.
Equity markets still challenging
While bank lending appears to be available to well-capitalized, investment-grade borrowers, equity markets remain challenging, with junior follow-on proceeds and IPO volumes at historic lows. This is creating new opportunities for alternative finance and private capital providers looking to invest.
“In the absence of traditional investor interest, we’ve seen a number of new buyers come on the scene, including state-owned enterprises, financial investors and commodity traders,” says Sprague. “Together, increased access to capital, improving credit availability and growing investor confidence are setting the stage for M&A activity throughout 2014.”
In terms of deal volumes, nearly three quarters of mining and metals respondents say they expect a global increase. However, they remain tentative about pursuing an acquisition.
During the nine months leading to September 2013, only 537 deals totalling US$96.9 billion closed. These numbers are down 24% and 22%, respectively, over the same period in 2012. Total deal value, excluding the merger between Glencore and Xstrata, was US$59.5 billion, which the analyst say it highlights an even larger drop-off when taking account of this unique deal.
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