Dentons provides their view on the recent performance of the mining M&A trends and consolidation.
For a couple of years now many observers of the mining sector have viewed consolidation as an inevitable and necessary component of the recovery from difficult market conditions that began in 2012. However, despite that fact that market conditions have recently improved, the recovery has not been led by a wave of consolidation as anticipated. Yet the consolidation thesis still holds, even if the timing seems to have been a bit delayed, as supported by recent M&A trends.
Recent M&A activity has heavily dominated by sale processes as companies look to divest non-core assets to continue to clean up their balance sheet. Late stage development and producing assets have attracted the most attention, particularly from private equity funds whose investment models steer them towards that asset profile. Sellers (and their advisors) have leveraged the diverse groups of interested parties to maintain valuations, which have for the most part held firm. The result has been longer processes and more creativity in deal terms. The willingness of sellers to accept contingent consideration is an example of creativity in deal terms and also perhaps a sense of optimism that better market conditions are ahead.
Virtually every discussion of M&A trends involves China, as it drove the last M&A boom. Spurred by reports of metal- intensive infrastructure project plans within China and ambitious foreign investment projects like the Silk Road, it appears that China is once again looking to acquire mining assets. Only this time many of the buyers are private capital and not just state owned enterprises.
However, buyers remain cautious in executing transactions, which means deals take longer and are harder to put together. It is extremely important for potential targets to focus on de-risking assets as much as possible, and facilitating detailed due diligence to enable buyers to get comfort on all aspects of the target. Community and social license issues are key risks that are getting a lot of attention, as they have the potential to derail even the best financial model by adding delay and uncertainty. Financial models themselves are subject to increased scrutiny using a multitude of inputs designed to stress test assets to support valuations. Simply put, as the industry continues to recover from the shadow of over exuberant spending and deal-making, no one wants to be wrong.
Despite the continued cautious approach, it appears that as we close 2016 the pieces may finally be falling into place to see increased M&A activity. At some point consolidation will happen, so it bodes well to be well prepared.
Text was originally published in the Mining Investment Latin America Summit Mining & Investment Special Report.