Junior miners ready to pounce on bargains

Cape Town - Walking through the exhibition hall at the 2016 Investing in African Mining Indaba, it is clear fewer people are attending this year, Wickus Botha, EY Africa's mining and metals sector leader, told Fin24 on Monday.

Role players in the local and international mining industries have descended on Cape Town for the 2016 Investing in African Mining Indaba taking place until Thursday.

According to Botha, the signs in the exhibition hall of a smaller attendance, show that most mining companies are taking financial strain due to low commodity prices.

"Of course some mining companies are taking serious financial strain, while others could probably see the storm out," said Botha.

In the short term, he thinks virtually all the mining companies are focusing on cash generation. They are looking at ways to cut back on costs and spending.

"Currently there are roughly three groupings of mining companies, namely the big or the mid-tier ones with a lot of debt; the big or mid-tier ones with lower levels of debt; and thirdly, the junior mining community," said Botha.

In his view, many of the mining companies with huge debt have tried to service it with internally generated cash over the past few years. This was in the hope that commodity prices would improve.

"Now we see a lot of assets coming onto the market. What is different now, however, is that while some of those assets have been on the market for a while already, there was a valuation gap. Sellers wanted more than buyers were willing to pay. They were, therefore, not closing the deals," explained Botha.

"What you find now is that they are moving closer to each other, they are sort of finding an expectation of what the bottom of market is going to be."

Therefore, in Botha's view, one might start seeing an increase in deal making activity - partly because the valuation gap is going to narrow as buyers, sellers and financiers get closer to each others’ expectations.

READ: Right time for mining companies to bounce back

A new EY report released on Monday, found that financial distress among mining and metals companies will shape merger and acquisition (M&A) activity in the sector in 2016. Divestments are expected to pick up the pace on the back of volatility and uncertainty on the timing of a recovery.

After the fifth consecutive year of declining deal volume and values, increasing levels of financial distress will trigger more divestments, spin-offs, joint ventures and possibly hostile takeover bids.

“Anticipating transaction risks such as separation and regulatory and joint venture approvals take on greater importance in this market. Prospective buyers are thin on the ground and they will reduce valuation, or even walk away, if these issues aren’t adequately addressed,” said Botha.

Overall mining and metals deal volume globally in 2015 sank to the lowest level since at least 2000, with just 358 deals completed.

Excluding the $8.7bn BHP Billiton demerger of South32, overall deal value globally dropped to $40.0bn, with a strong bias to domestic deals and assets in developed markets.

Africa-focused deals saw a drop of 56% with 26 deals completed, and overall deal value dropping by 52% at $1.6bn.

Another interesting trend observed by Botha, is that junior mining companies are starting to lick their lips for some of these assets up for sale.

"Some of the assets coming onto the market at the moment are very good assets and not typically what you would find on the market when the mining industry is doing well," said Botha.

"Junior minors usually do not have access to those kinds of assets."

READ: Mining companies failed to prepare for 'winter' - Zwane

In Botha's view junior and mid-tier mining companies would want these kinds of assets as they operate much more agile business models with lower overheads and more flexible decision making.

"So, if they run a mine with lower expectations they can do a better job. And if they bought it at a lower price, they will not be so pressurised to meet short term targets," said Botha.

He said it would be natural to ask why a company would want to buy those assets?

"I think commodity prices will be low during the 2016 calendar year and probably recovering in the latter part of 2016 and early 2017," said Botha.

"Commodity prices do not operate in a vacuum. They are highly influenced by the global economy, but also by oil prices. When you start seeing oil prices recovering, it is perhaps a sign of changing investment prices and perhaps metal prices too."

The EY report warns that with a glut of assets, scarcity of capital, selective buyers and market conditions forcing accelerated sales, getting divestment processes right will be paramount to achieving a sale for even the best quality assets.

Botha cautioned buyers of these assets, however, to make sure they have enough sufficient working capital to see them through in the short term.

"This is because in all likelihood you will not make a lot of free cash in the short term," he said.

"Increasingly, mergers and joint ventures will be pursued, with the key focus on de-risking and preserving capital. The necessity to de-risk and preserve capital will drive deals to completion."

ALSO READ: Zwane: Regulatory certainty top priority for mining

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