Special Report, The M&A Cycle: Commodity bust signals M&A wave in mining – for the right assets
Lower Chinese demand for raw materials and sluggish growth in most industrialised economies have forced mining companies into extensive repair work to bring capital structures and spending plans in line at the end of the ‘commodities supercycle’.
Nearly one third of smaller miners said they needed to raise additional capital within six months, and 35% of the majors anticipate a need to change their capital structure within a year, according to Grant Thornton’s global mining survey.
“It’s an untenable situation for many mining companies,” said Jeremy Jagt, national mining leader at Grant Thornton Canada.
Mining executives are looking to reshuffle their holdings in pursuit of sustainability. Fully one-third say their companies are likely to acquire a mining unit, division and/or company, while another third say their companies are likely to be sold or taken over, or undergo a partial sale or recapitalisation.
“The signs in our survey and the market point to an increase in the value of mining M&A deals in 2015,” says Grant Thornton.
The primary theme is to gain performance through specialisation. So although major miners are likely to be acquirers, 38% say their company’s primary strategy is to manage fewer core commodities – and nearly 30% want to reduce their operational reach.
“The problem with divesting these assets – and it is going on in iron ore and diversified miners – is who’s the buyer and who’s going to finance the buyers?” says Bart Jaworski, a mining analyst at Davy, a stockbroker. “Nobody wants assets that aren’t performing.” That’s the conundrum, agrees Jaworski: “No bank is going to finance a purchase of mediocre assets.”
BHP Billiton, for example, failed to find a buyer for its Australian nickel assets. “They’re going to have to hold on to it, and decide whether to shutter it or put it on care and maintenance,” says Jaworski.
But mining companies can face big risks from rebuffing bids while prices decline. Late in 2014, Jaworksi initiated coverage on Rio Tinto, the low-cost producer in the iron ore industry, with an “underperform” rating and a price target implying downside of about 15% from Q4 2014 levels. Davy’s survey of Chinese ore traders and steel mills found that 100% and 60%, respectively, expected iron ore prices to fall in 2015. That will make it tough for Rio to fend off a potential hostile merger offer from Glencore, which Rio had rebuffed in 2014. Rio has shed numerous assets, and is expected to announce a share buyback when it reports results this February.
But, the possibility of a hostile offer in 2015 adds urgency to Rio’s efforts to win shareholder support for its streamlining programme. The bottom line is that “the huge volumes of assets for sale by majors, such as Rio Tinto and BHP Billiton, will not all necessarily find new homes”, says Grant Thornton’s Jagt.