Johannesburg - The volume of deals in South Africa's mining and metals sector increased 78% year-on-year (y/y), while deal value increased fourfold to $1.1165bn in 2016, according to an EY quarterly report entitled Mergers, acquisitions and capital raising in the mining and metals sector.
Platinum Group Metals (PGM) transactions drove SA deal value, with platinum deals taking the top two spots in SA for the year, making up half of the deal value for 2016. Sibanye was the acquirer in both of these transactions.
“In 2016, we saw divergence between commodities that’s set to continue this year. There’s no one-size fits all strategy - companies must carve their own strategic path based on their portfolio. Investors need to consider the company and not just the sector broadly,” said Quintin Hobbs, Africa mining and metals transactions leader at EY.
The report shows that Africa has bucked the global trend of a decrease in the volume of deals in the mining and metals sector. The revival in Africa of both deal value increasing at 62% year-on-year and deal volume increasing three fold to $5.818bn in 2016 provides an indication that the continent is starting to see an increased trajectory for mining and metals deals, according to the report.
“The surprisingly strong bull market in commodity prices in 2016, as well as renewed discipline and focus on cash preservation resulted in more lean and efficient organisations with stronger balance sheets," said Hobbs.
"This in context of deal activity in 2015 coming off a low base resulted in increased deal activity for 2016 and can be seen as a normalisation in activity.”
In the view of Hobbs, the outlook for mining mergers and acquisitions in Africa in 2017 remains positive and the trend of portfolio optimisation is likely to continue driving transaction flow this year.
The volume of deals in the global mining and metals sector is, however, at the lowest level since 2004, according to the report.
The volume of deals has fallen by 9% year-on-year to $44.3bn in 2016. Volume showed improvement from a low base of 358 deals in 2015 to 477 in 2016 – a rise of 33%.
“Ongoing volatility and an ever-changing macroeconomic environment made executing deals extremely difficult in the mining and metals sector in 2016," said Lee Downham, EY global mining and metals transactions leader.
"The level of divestments and assets listed at rock-bottom prices predicted at the outset of the year just didn’t materialise as the outlook improved so significantly through the course of the year.”
Strategic restructuring and sovereign security drove an increase in high-value transactions in the last quarter of the year. These included the completion of Alcoa’s Arconic spin-off of its downstream operations and Freeport-McMoRan’s sale of its Tenke Fungurume mine. Together, these deals represent 14% ($6bn) of total deal value in 2016.
Divestment activity also helped a number of mid-tier mining companies to consolidate their positions this year, with Kinross Gold, Boliden and New Hope undertaking acquisitions of divested assets.
The value of deals involving financial investors, including private equity, in 2016 remained consistent with 2015 levels despite attractive valuations and the desire to divest in the sector at the start of the year.
China returns to acquisitions
China more than doubled the value of domestic and cross-border acquisitions it made globally in 2016. Four of the top ten deals in the sector were undertaken by Chinese acquirers.
China Molybdenum’s activities alone accounted for $4.3bn worth of acquisitions – just under 10% of the overall deal value in the sector.
Two of the top ten deal deals by value were undertaken by China in cross-border transactions within Africa.
In 2016, capital raised in China also doubled to $100bn from the previous year due to a significant rise in domestic corporate bond issues. This masked an overall decline in capital raised across the sector globally, with Chinese bond activity driving a 9% increase to $249bn in total capital raised. Excluding China, global capital raised declined by 16% to $149bn.
"The discipline developed through 2015/2016 will continue with a focus on cost optimisation, balance sheet agility and productivity, limiting the amount of capital available for future growth projects," said Hobbs.