Mining M&A: Private equity can't run away fast enough
The report by advisors Ernst & Young shows 2014 was the fourth consecutive year of declining M&A activity, with deal volumes down 23% year-on-year to 544 in 2014, the lowest volume of deals since 2003.
Overall deal values have also been spiralling downwards, tanking 49% from 2013 to $44.6 billion in 2014, the lowest since 2004.
Lee Downham, EY Global Mining & Metals Transactions Leader, says the market outlook for 2015 varies from commodity to commodity, but expect another quiet year:
"While there is a sense that the mining and metals M&A market has hit its trough, deal activity is likely to remain subdued in the face of ongoing price volatility and capital discipline across the industry. Shareholders continue to cast a watchful eye over management’s investment activities, with many pushing for more cash to be returned via buybacks and progressive dividends.
“The pace of private capital investment has been considered, and this has proven to be the right approach as share valuations continue to slide on the back of softening metal prices. This investment should pick up once the price outlook stabilizes and that will most likely trigger broader transaction activity.
"Distressed situations may drive opportunistic buying in certain commodities, but most industry acquisitions will be mergers between equals that provide synergies for both parties, or consolidation opportunities."
In short: The smart money want to see more blood on the streets and wait for fire sale prices before jumping in or worse, has simply lost interest. The graph shows financial investors now make up less than the "other" category – presumably referring to rich aunts and uncles.
Mining and metals have become incestuous: industry insiders were responsible for 82% of deal value and 71% of deal volumes. The 11 – only 11 – deals worth more than $1 billion were all industry acquisitions too.
If you're charitable you could argue that mining boards' knowledge of the industry place them in a position where they see value and opportunity where merchant banks and private equity investors cannot.
But you'll be less inclined to generosity once you look at how post-acquisition writedowns have destroyed historic profits at particularly gold miners. For example, Barrick Gold boast retained earnings of a negative $7.8 billion and a company like Kinross Gold has an historic loss of $8.5 billion – more than double its current market value.
E&Y says the larger number of sub-$10m deals which makes up nearly two-thirds of all deals "indicates distress among juniors and opportunistic buyers entering the market".
Opportunistic buyers buying distressed assets (aka vulture funds picking at carcasses) aside, what's happend to the billions readied for the sector we've been told for the past two years are imminent?
Bloomberg estimated funds raised for investments in mining and metals last year topped $1 billion, compared to about $8.8 billion in 2013. Others put the figure as high as $15 billion:
The nearly $5 billion war chest built up by former Xstrata chief executive Mick Davis' new venture X2 Resources has yet to be put to any use. Rumours of possible targets are not in short supply with BHP Billiton's spin-off South32 often bandied about. Davis was CFO of Billiton at the time of the merger so he knows the business, but why buy what BHP wants to rid itself of?
Private equity firms like Apollo Global Management which raised $1.3 billion for resource assets in 2013 hasn't announced any major deals since $300 million for a Virginia coal mine back in February 2013.
Big names like Warburg Pincus, KKR and Carlyle have also kicked tires but haven't been persuaded to even go for a spin and Denham Capital's last deal in November was $100 million for Auctus Minerals which will now start looking for opportunities on the $7.9 billion funds behalf.
Brookfield Capital Partners' $3 billion pool is now targeting property and infrastructure.
Waterton Global Resource Management's $1 billion raised in April last year has resulted in some 70 confidentiality agreements with miners, but only tiny investments in a couple of Nevada gold projects and a takeover of another Nevada miner Chaparral, but not after being persuaded of a loan-backed sweetened offer of $73 million.
Resource Capital Funds have been busy with the $4 billion they've raised over the years, but are not exactly shooting the lights out. And if there ever is a cautionary tale about private equity and mining, it's Resource Capital Funds and Molycorp, once dubbed "one of the greatest private equity deals ever".
BlackRock World Mining had their fingers badly burned with West African iron ore (so badly that Ebola had to take some of the blame), which may act as a warning to others.
QKR Corp, a $1 billion Qatar-backed fund set up by former JPMorgan Chase bankers Lloyd Pengilly and Roger Kennedy, bought Anglo-American's Navachab mine in February last year for $110 million. Since then it's been quiet. If Qatar can't be persuaded to stick big money into mining, who will?
Star-studded Appian Capital Advisory raised $375 million last February and talked about $150 million per year for the next decade. Fast-forward a year and Appian can report on some $30 million for West African explorer Roxgold, the first $1 million of a package of $20 million for an Australian rare earth junior and $13 million for Avanco Resources which is close to production at a Brazilian copper project.
Perhaps 2015 may yet see more excitement for the sector.
There's also a dark horse that's entered the fray – Sandown Bay Resource Capital set up by two Rio Tinto and KKR alumni, have raised $1 billion. There's been zero news out of the London-based company that's only seven months old. Hopefully that's an indication they're working on something big.
Downham tactfully describes what may have been going on with PE and mining: "There has been some criticism of private capital for not deploying capital in the early and middle parts of last year, but with the benefit of hindsight the patience in their deployment should pay off, the market softened a further 20% over the past year."
If only that wasn't so true.