optimize for today? build for tomorrow?...mining and metals companies were also focused on...
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Optimize for today? Build for tomorrow?Mergers, acquisitions and capital raising in mining and metals — 2018 outlook
2 | Optimize for today? Build for tomorrow?
Will stronger balance sheets fuel miners’ growth ambitions? The focus for most of the sector in 2017 was consolidating balance sheet strength and maintaining capital discipline. Mining and metals equities were attractive to investors due to:
• Decreasingfinancialriskmainlyachievedthroughdebtreduction;weestimatesectornetdebtdeclinedbyatleast15%in2017
• Improvingmarginsbolsteredbybuoyantcommodityprices,fueledbysupplyrestraintjustasglobaldemandforvariouscommodityend-usesectorsrecovered
Mining and metals companies were also focused on optimizing portfoliosin2017.DivestmentsremainedasignificantdriverofM&Atransactionsduringtheyearasnon-coreassetswerespunoffinfavorofleaner,moreconsolidatedportfolios.
Asexpected,strategiesdivergedsignificantlybyregionandbycommodity.Forexample,consolidationcontinuedintheUSandChinesecoalsectorstoreininexcesscapacity.Inthegoldsector,NorthAmericanplayersbegantoexpandgeographicallyinsearchoflowerriskjurisdictions.
Environmental regulations and the electric vehicle (EV) revolution ignitedvariousplayerstoconsiderinvestmentintothefuturesupplyofcommoditiesusedinbatterytechnology.Asaresult,lithiumandcobalt assets across the world have seen increased interest from diversifiedminersandnicheplayersalike,aswellasfromfinancialinvestors.Focusremainsonqualityofassets,and2018willlikelysee a handful of larger transactions in anticipation of greater competition for the commodities of the future.
Strongerfinancialhealthhasalsoenhancedcompanies’optionsinaccessingfinancingforgrowththroughconsolidatedandstrategictransactions.Thehealthyoutlookfortheminingandmetalssectorhasnotonlyboostedaccesstodebtbutalsoimprovedtheeaseofraisingfinancesviaequitymarkets.
Caution still remained in 2017 regarding executing transactions forbothacquisitiveandorganicgrowthprojects.Instead,excesscashproceedsbolsteredcompanies’resolvetoclarifytheirdividendpolicies and cash was returned to shareholders.
Shareon social media
Note: Thedateincludescompleteddealsonlyandisprimarilysourced from ThomsonONE.
Key trends
Focus shifts to shareholder value creationWithstrongcashgeneration,sectorcapitalallocationdecisionsareincreasinglyinvestmentfocused,ratherthangearedtowardfinancialresilience.Withsignificantlevelsofcashreturnedtoshareholdersduring2017,thefocuswillnowshifttogrowthwithabalancedcapitalagenda.Moreover,thisbalancedcapitalagendawillcatertoboththeshort-termneedsofshareholdersandthelong-termsustainabilityofshareholderreturns.
The ease of securing funding for the growth agenda has also improvedmarkedly.Financingoptionswillnotonlybelimitedtotraditionalsources:innovativefinancingsolutionsarebeingstructuredtoaddressnewerrisksposedbyincreasinglypopularinvestmentsinlithiumandcobalt.Keytocompetitivenessandsustainablevaluecreationwillbeachievingtherightmixofcapital,whichbalancesnear-andlong-termliquiditywithflexibilityandatan optimal cost.
Ultimately,thequalityofassetswillbeakeyconsiderationinexecutingthegrowthagenda.Thatsaid,thequalityofpipelineprojectsattheexplorationstagecontinuestoerode,andtheallocationoffinancingfornewexplorationmandateshasbeenlimited.Assuch,juniorplayerswithprovedresourcesreadyfordevelopmentwillbeofinteresttobothproducersandfinancialinvestors.However,thereducedinventoryofexplorationanddevelopmentstageprojectsmaylimitinvestorstobuyingproducingassets in order to increase output volumes.
Optimize for today? Build for tomorrow? | 3
Understanding future demand to plan for growth now
EV and battery minerals
Manyoftheworldeconomiesareintroducingmeasurestoreducethe reliance on internal combustion engines.
Inresponse,carmanufacturershavebeenshiftingtheirfocustothedevelopmentofEVsandinvestinginbatterytechnology.Inalandmarkmove,Volvoannouncedin2017thatallnewVolvocarsfrom2019onwardwillbepartiallyorcompletelybatterypowered.1 Othermajorcarmakers,includingRenault-Nissan,BMWandVW,havealsosetambitioustargets.EVdemandhasaccelerated,andsalesofelectriccarsareforecasttoexceeddieselcarsasearlyasMay2019.2
KeymetalsinthebatteriespoweringtheseEVsarecobalt,lithiumandnickel.Supplyofthesemetalsisnotexpectedtomeetforecasteddemand.Cobalt,inparticular,facessignificantsupplychallenges due to the location of mineral deposits and limited numberofminescomingonline.CobaltsupplyisheavilyreliantontheDemocraticRepublicofCongo(DRC),whichcurrentlyproduces65%6ofglobalsupplyandholdsalmosthalfoftheworld’sreserves.7However,politicalinstabilityintheDRCandthechallengeofethicallysourcingcobalthavemadeitalessattractivebutstillnecessaryinvestmentregion.
Thesupplyoflithiumisnotasconstrained.LithiumisextractedfromhardrockinAustraliaandfrombrinesinSouthAmerica(majorproducersincludeArgentina,ChileandBolivia).Futurepricingwillbequality-ledandlikelytogothroughdemandcycles.
Thescarcityofsupplyofcobalthasledtomoreadventurousminingtechniques,includingdeepseamining.CanadianfirmNautilusResourcesisintendingtosendmachinestoharvestdepositsrichingold,copper,manganeseandcobaltfromtheseabedofPapuaNewGuinea.Researchisalsounderwayintobatteriesthatuselesscobaltandmorenickel.
Increased interest is expected in assets producing fourth generation metalsfromcarmanufacturersthatarelookingtoinvestinminestosourcematerialsfortheirEVs.Forexample,ToyotaindirectlyinvestedinAustralian-listedlithiumproducerOrocobrethroughitstradingarmToyotaTsusho.8ChinesecarcompanyGreatWallMotorsCompanyinvestedinPilbaraMinerals,anupstreamlithiumsupplier,
1 “Volvocarstogoallelectric,”Volvo Car Group press release,5July2017.2 “Electriccarsalreadycheapertoownandrunthanpetrolordiesel—study,”The
Guardian,2December2017.3 “Francetobansalesofpetrolanddieselcarsby2040,”The Guardian,6July2017.4 “Thesecountriesarebanninggas-poweredvehiclesby2040,”Business Insider,
23 October 2017.5 “Chinasets2019deadlineforautomakerstomeetgreen-carsalestargets,”Reuters,
29September2017.6 “Carmakers’electricdreamsdependonsuppliesofrareminerals,”The Guardian,
30July2017.7 “Cobalt—MineralCommoditySummaries,”US Geological Survey,January2017.8 “ToyotaTsushotoacquireastrategicstakeinOrocobre,asuccessfulAustralianbased
lithiumminingcompany,providinglongterm,stablesupplyoflithiuminresponsetogrowingglobaldemand,”Toyota Tsusho press release,16January2018.
9 “China’sGreatWallMotorCompanybacksPilgangoorastage2expansionwithlandmarkoff-take,fundingdealandequityinvestment,”Pilbara Minerals press release,28September2017.
10 “PalaInvestmentslaunchesnewenergymetalsfund,”Pala Investments press release,8August2017.
theUKandFrancehave pledged to
ban sales of petrol and diesel cars3
NorwayandtheNetherlands have
pledged to ban sales of petrol and
diesel cars4
China is targeting zero-emissioncarsas10%ofnewcarsalesandas12%of new car sales
by20205
By 2019By 2040 By 2025
“ With the rise in demand for EVs and battery storage, portfolios are beginning to shape themselves towards new technologies. Companies with an eye on growth should start to consider how these minerals could fit into their portfolios.”
Lee Downham EY Global Mining and Metals Transactions
tosupportitslithium-tantalumprojectviaofftakeagreements,equityanddebtfinance.9PalaInvestmentshaslaunchedaUS$150mfundtoinvestexclusivelyinmetalsusedinEVbatterytechnology(cobalt,lithium,vanadium,rareearths,nickelandtin).10
Policies are boosting the rapid acceleration of EV demand
4 | Optimize for today? Build for tomorrow?
Therewasasignificantincreaseindealvalueacrosstheminingandmetalssectorin2017,markingthehighestvalueofcompleteddealssince2013.However,whiledealvalueroseby15%year-on-yeartoUS$51basdealdriversshiftedfromdivestmentledtostrategicallyfocused,thevolumeoftransactionsfellby6%year-on-year.Withmetalspriceslargelyholdingupand,incertaincases,rallyingthroughtheyear,cashgenerationremainedincredibly
strongacrossthesector,allowingleveragetobefurtherreduced,dividendsrestoredandsignificantcashreturnedtoshareholdersthroughbuybackprograms.Alongsidethiscapitaldiscipline,webegantoseetheemergenceofinvestmentstrategies,withcapitalearmarkedfororganicprojectsandincreasinglyconsideredforacquisitions.
China tops activityChinacontinuedtobeakeydriverofactivity,leadingdealsbyvaluebothasanacquirer(US$18.7b,36.6%)andasatarget(US$13.6b,26.6%).Theseweremainlydomesticsteelandaluminiummergersaimedatindustryconsolidationtodriveefficiencyacrossthemetals
sector.OutsideofChina,NorthAmericanparticipantswereactiveinUS$16.2bworthofdeals(32%ofglobalvalue)aseitheratargetoracquirer,totaling188deals.
M&A trends and outlook
Glencore Xstrata merger
South32 spin-out
<US$200m Between US$200m and US$1b >US$1b Volume
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M&A — value and volume (2008–2017)
Optimize for today? Build for tomorrow? | 5
Deal activity by region (2017)
Note: Deal numbers are where the regions is either the target or acquirer
Europe
Latin America
North America
Asia-Pacific ex China
Middle East
CIS
Africa
China
LatinAmerica Africa Europe CIS China
Asia-Pacific(ex-China)
MiddleEast
Value (US$b)
Volume 33
5.2
ChangeY-o-Y
21.4%
10.9%
ChangeY-o-Y
164
9.9
9.3%
9.7%
ChangeY-o-Y
10
0.97 46%
0.0%
ChangeY-o-Y
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8.2 254.7%
3.4%
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6.2 110.7%
20.5%
ChangeY-o-Y
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0 100%
100%
NorthAmerica
ChangeY-o-Y
188
16.2 18.1%
3.1%
ChangeY-o-Y
78
18.7 15.2%
15.2%
Portfoliorealignmentwasalsoprominentasthediversifiedproducerslookedtodivestthoseassetsnolongerconsideredcoretothebusinessandtofreeupcapital.ThisincludedtheRioTintodisposalofitsCoal&AlliedassetstoYancoalasitlookedtoreduceits thermal coal exposure.
Portfolio management the key driverImprovingmarketconditionsin2017underpinnedanumberoflargetransactionswithastrategicfocus.SibanyeGold’sacquisitionofUSproducerStillwaterMiningforexample,demonstratedadesiretogeographicallydiversifyandexecuteavolumegrowthstrategy.HeadlinesweremadeasVolcanInvestments,aprivatelyheldfamilytrustofAnilAgarwal,acquiredapositioninAngloAmericanduringtheyear.
“ Last year we saw fewer deals but at better values. In 2018, we expect to see more deals supported by investment-led strategies to diversify by commodity or region. Some of this activity will be to shape portfolios for future growth and sustain shareholder returns.”
Lee Downham EY Global Mining and Metals Transactions
6 | Optimize for today? Build for tomorrow?
Commodities divergeCoalandsteelwerethemaindriversofdealvalue,withcoalacquisitionsup156%on2016toUS$8.5b.However,volumefellby27%to30intheyear.This,inpart,reflectsanumberofthermalcoaldivestmentsfromthelarge,listedproducerslookingtoreduceexposureastheenergymixmovestowardrenewables.
SteeltransactionsdoubledinvaluetoUS$13.3b,thebulkofwhich(US$9.3b)comprisedthelargeChinesemergersanddivestmentsinLatinAmerica,suchasThyssenkrupp’sdisposalofitsBraziliansteelmill to Ternium.
Golddealsdeclinedin2017,falling34%byvaluetoUS$7.3b.Goldcorpwasparticularlyactiveduringtheyear,buyingstakesintheCerroCasaleprojectinChilefromBarrickGoldandKinrossGoldandacquiringExeterResourceCorp.,anexplorerfocusedonpreciousandbasemetalsprojectsinChile.BarrickGoldcontinuedtorealignitsportfoliowiththedivestmentofa50%stakeintheVeladerominetoShandongGoldMiningforUS$960m.
Therewasrenewedactivityforexplorationstageassets,withdealsincreasingsignificantlyto31dealstotalingUS$72min2017.Thiscomesoffahistoricallylowbaseofsixdeals,valuedatUS$9.4mthepreviousyear.Roughly75%ofthedealstargetedassetsinlowriskjurisdictions,suchasNorthAmericaandAustralia,withprospectsgenerallyfocusedonexploringforpreciousmetals.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2014
2013*
2015
2016
2017
Industry acquirers Financial investorsState-backed acquirers Other sectors/tradersSpin-outs Undisclosed/other
* Excluding the Glencore Xstrata merger
Share of deal value by acquirer type
Investors starting to return to the sectorIndustryparticipantscompletedalmost70%oftheyear’sdealsbyvolume.However,financialinvestors,whowereresponsiblefor22.4%ofdealsduring2017,returnedtothemarket,undertakingUS$9.5bworthofdeals.
Silver/lead/zinc
30
2.7
Volume
Value (US$b)
Change Y-o-Y
17%
32%
Potash/phosphate
4
0.2
Volume
Value (US$b)
Change Y-o-Y
33%
70%
Steel
42
13.3
Volume
Value (US$b)
Change Y-o-Y
9%
101%
Copper
29
3.1
Volume
Value (US$b)
Change Y-o-Y
6%
54%
Aluminium
10
3.1
Volume
Value (US$b)
Change Y-o-Y
38%
8%
Coal
30
8.5
Volume
Value (US$b)
Change Y-o-Y
27%
156%
Gold
134
7.3
Volume
Value (US$b)
Change Y-o-Y
13%
34%
3
0.1
Volume
Value (US$b)
Change Y-o-Y
50%
89%
Nickel
9
0.5
Volume
Value (US$b)
Change Y-o-Y
50%
127%
Iron ore
Deal activity by commodity (2017)
Optimize for today? Build for tomorrow? | 7
With stronger balance sheets across the sector,minersareincreasinglyreturningtoaninvestment-ledstrategy,whichis driving a renewed focus on building portfolios that deliver sustainable shareholderreturns.Inevitably,dealswillcontinuetoshiftfromdivestment-ledtoinvestment-ledwiththekeydriversbeingpipelinereplenishment,synergisticvolumegrowthandnext-generation mineral demand. Activist investors,meanwhile,willcontinuetoshapeminers’strategies,affectingthechoiceofcommodityportfolioandvolume of ambitions.
With the buzz around new world critical mineralsandbatterytechnology,dealsinlithium,copperandcobaltare expected to feature high on the agenda of management teams across theindustry.Continuedpressuretoreduce the reliance on fossil fuels will lead to further divestments or spin-offs.InChina,havingseenthecompletionoflarge-scalesteelmergers,similarmergeractivityincoalisalsoexpectedasthecountrystartstotargetraw materials in its environmental initiatives.
Strategieswillalsobeinfluencedbygeopoliticalfactors.PresidentTrump’srecent order to reduce reliance on importedcriticalmineralsmaysparkactivitybyUSminerstoconsiderexploration assets both in and outside ofNorthAmerica,aswellasupstreamand downstream collaborative ventures. The desire to shift from highertolowerriskjurisdictionsmayalsoinfluenceportfolioadjustment,particularlyforpreciousmetals.Forlithium,investorsinnewassetsareexpectedtoprioritizeSouthAmericanandAustralianassets,consideredtobeoflowerpoliticalrisk.
Outlook for 2018
8 | Optimize for today? Build for tomorrow?
Mining and metals companies maintained capital discipline in 2017 astheycontinuedtocontrolexpenditureongrowth,sustaincapitalandminimizeoperationalcosts.Despiteimprovedaccesstocapital,thefocuswaslargelyonshort-termneeds,suchasworkingcapitalandrefinancingrequirements.Consequently,globalaggregatecapitalraisedincreasedbyjust3%in2017comparedtothepreviousyear.
In2017,wesawabroaddistributionofcapitalraisingactivityglobally,markingadeparturefromthepreviousyearwhereChinadominated.Chinawasresponsibleforjustunderathirdofcapitalraised,downfrom40%year-on-year.Onthebackofstrongervaluations,equityinstrumentscontinuedtogainpopularityover debt.
Demandforalternativesourcesoffinancing,suchasstreaming,royaltiesandofftakeagreements,softenedin2017.Thesehad
Access to capital improves as mining and metals companies’ performance mirrors firming commodity prices
Capital raising trends and outlook
ChinaWorld ex-China
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Capital raised — regional split (2013–2017)
becomepopularduringthelowcycle(2012to2016)ascompaniesfacedfinancialstressandapoorcreditoutlook.However,strengtheningfundamentalsandavailabilityofcheaperoptionshavereversedthetrendin2017,withmostindustryparticipantsonceagainoptingformoreflexible,traditionalfinancialinstruments.
Optimize for today? Build for tomorrow? | 9
Spotlight on capital structure and return to growthMiningandmetalscompanieshavesignificantlyde-leveraged,usingcashproceedsfromtherecoveryofcommoditypricesin2016.While there is still scope to retire expensive instruments in favor ofcheaperandflexiblefacilities,furtherreductionofdebtatthepaceofrecentyearsisunlikely.Already,debt/equityratiosformostplayershavefallenbelow30%,raisingquestionsontheefficiencyofcapitalstructuresand,inturn,raisingthelikelihoodoffurthersharebuybackprograms.
In2017,mostmajorsbeganrestoringdividends;however,returningcashalonewillnotbesufficientinthejourneytowardsustainablevaluecreation.Miningandmetalscompanieswilllooktogrowtheitherthroughinvestinginpipelineprojectsorthroughacquisitionofotherassets,providedtheycomplementexistingportfolios.Thiswilllikelytriggerequityraisingthroughbothinitiallistingsandsecondaryequityofferings.Whilepastexperiencesmaycaptheappetitefornewdebt,inefficientcapitalstructureswillsupportmoderateexpansionofdebtfinancingin2018.
Capital raising by deal typeLoansLoanproceedsreboundedin2017followingtwoconsecutiveyearsofdouble-digitdeclines,risingby9%year-on-year.TransactionsincreasedtoUS$112bduringtheyear,still40%behindtheUS$187brecordedattheendofthesupercyclein2011.Whileriskaversionbylenderscharacterizeddwindlingtransactionsin2015and2016,itwastheminingandmetalscompaniesthatpreferrednot to expand credit in 2017. In response to a strengthening sector creditoutlook,banksloosenedconditionsforaccesstotermloans.Thevolumeoftransactionsactuallyincreased,rising17%year-on-yearto215deals.Loanswereprimarilygearedforshort-termliquidity,withrequirementsforworkingcapitalandexistingloanrefinancingaccountingforover83%oftheissuedloans.
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As focus shifts from debt reduction to creatingshareholdervalue,companies’lendingrequirementswillalsoadjust.Increasingproductivityasdemandfor metals improves will mean more workingcapitalrequirementsformanycompanies,whileothersmayrefinancehigh cost facilities negotiated during the distress period.
Outlook for 2018
“ Access to capital improved significantly in 2017. In 2018, we expect stronger demand for financing and flexibility to remain important as the sector seeks to maintain a balanced and efficient capital structure.”
Hopewell Mauwa EY Global Mining & Metals Transactions
10 | Optimize for today? Build for tomorrow?
BondsBondproceedsdeclinedby8%in2017toUS$106b,withthebulkoftransactionsusedtorefinanceexistinginstruments(buybacks).Thevolumeofdealsremainedalmostunchangedyear-on-yearat484in2017(467in2016).Chinaremainedthemajorissuerofbonds,responsibleforalmosttwo-thirdsofissuesglobally.OfthebondsissuedinChina,coaldealsaccountedforover61%oftransactionvalue.
Convertible bondsProceedsmorethandoubledin2017toUS$5.7b.ChinaandSouthAfricaaccountedfor80%ofthevalueofglobaldeals.InChina,roughlyUS$3.3bworthofconvertiblepaperwasissuedbysteelandironorecompanies.Suchcompanieslikelysensedlimitedupsideasbothironoreandsteelpricespeaked.InSouthAfrica,platinumandgoldcompaniestransactedalmostUS$1bworthofdeals.Usageofconvertiblenotescouldhavealsobeendrivenbypreciousmetalspricesrecordingthelowestgainsin2017andtheneedtospreadanddiversifycountryriskaheadofkeySouthAfricanleadershipelections.
The expected return to investment across the sector willbethemajordriverofnew bond issuance in the near term. The case for issuing new notes will be supportedbythesignificantde-leveragingthathastakenplaceinrecentyears,arguablyresultingincapital structures that are tooequityheavy.Further,investor demand for bonds has improved due to better credit ratings.
Convertible bonds remain among the least used capital raising instruments in the sector,accountingforjust1%ofnewcapitalraisedin2017.However,asgrowthand acquisitions gain momentum in an uncertain pricingenvironment,theuseofconvertiblesmayalsogaintraction.
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Outlook for 2018
Bond volume and proceeds (2013–2017)
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Optimize for today? Build for tomorrow? | 11
IPOs
The expected stabilization ofthecommoditypricingenvironment should fuel moreequitylistingsacrossa number of commodities. Risingdemandforbatterytechnologymetalsis expected to drive fund-raisingforprojectexpansionsin2018,especiallyfordevelopmentassets entering into production.
The return to growth and an appetite to fund developmentprojectsareexpectedtobethekeydriversforsecondarylistingsin2018.Commoditypriceshaverisensignificantlysince2016,andequityvaluations have appreciated accordingly.
Follow-on equitiesSecondarylistingsincreasedin2017onstrongshareperformanceacrossthesector.Aggregatecapitalraisedthroughfollow-onequityincreasedtoapost-2011highofUS$30.7b,an8%risecomparedto2016.ActivityhasspreadgeographicallyacrossChina,AustraliaandCanada,whichcombinedaccountedforalmost60%ofvalue.
IPOmarketsimprovedduringtheyearamidthestrengtheningoutlookforthesector.GlobalaggregateproceedsfromIPOsincreasedtoUS$2.8b,thehighestinsixyearsbutstillfarlowerthantheUS$17braisedattheendofthesupercyclein2011.TheheadlinedealwastheUS$1.5blistingofRussia’sEn+,analuminiumandhydropowerbusiness.7IntheUS,coallistingsaccountedforalloftheUS$397mworthoflistings,whereasinChina,copperIPOsaccountedformorethanhalfoftheUS$395mintransactions.
Outlook for 2018
Outlook for 2018
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7 “Russia’sEn+launchesIPOinLondonandMoscow,”City AM,5October2017.
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