Mining M&A: Where have the deals gone?
The lack of M&A activity in the mining sector in 2012 has continued through the first half of 2013, consistent with a low level of M&A in the market more generally.
The buoyant mining M&A market peaking in 2011 rode on the back of high coal prices and strong demand for coal and iron ore in China. Absent these factors, the ability to get mining M&A deals over the line has become increasingly difficult.
Faced with costs pressures and falling commodity prices, larger miners have undertaken strategic reviews to test proposed expansions, marginal projects and determine which assets are ‘non-core’. The result of these strategic reviews has been a number of ‘for sale’ signs posted on various operating coal mines.
At the smaller end of town, junior miners have been seeking partners to develop early-stage coal projects and secure off-take arrangements to sure up prospective mining projects. Despite a reasonable number of prospective transactions in the market, there has been little deal execution in the mining sector this year.
Why are mining M&A deals failing to launch?
The prevailing market conditions in Australia, with low commodity prices, a historically high Australian dollar, perceived high costs and some uncertainty on the tax regime, means buyers are not rushing to sign-up mining M&A deals. Rather, there seems to be a lot of ‘tyre-kicking’ from prospective buyers without much desire to follow through to deal execution. This has made it very difficult for sellers to run mining sale processes with competitive tension on a structured timeline (as was more typical for processes being conducted in 2011).
What must change to kick-start more mining M&A?
Australia is fortunate to have a very strong mining industry with plentiful resources and world-class infrastructure. Australian mining projects will always require capital. Continued foreign investment, particularly from Asia, is a given. In view of these circumstances, it is inevitable that mining M&A will pick up and further mining M&A deals will be concluded.
Despite the anticipated positive impact of a lower Australian dollar and reducing interest rates, some re-balancing of pricing expectations may be needed to address what appears to be a pricing mismatch between sellers and buyers at the moment. If such a re-balancing occurs, sellers may have an opportunity to obtain a ‘clean’ exit on a mining M&A deal with reduced legal protection offered to buyers in the sale documentation in return for a lower price.
If sellers insist on achieving a ‘clean’ exit due to a perception that buyers are not paying ‘top dollar’ for mining assets, comprehensive due diligence will be a ‘must’ for both sellers and buyers.
On the sell-side, it will be important for sellers to ensure that full disclosure of all issues is made to prospective buyers to mitigate against possible legal exposure for breaches of contract or statute.
On the buy-side, thorough due diligence from buyers will aid in determining appropriate pricing for mining assets and give buyers some comfort where they agree to forgo some legal protection by accepting reduced warranties and indemnities under the sale documentation.