(Minews) - Tumbling commodity prices are aggravating the problems of cash-strapped mining groups and could spur a rebound in dealmaking in the sector, analysts and bankers said.
Mining stocks, which enjoyed a bull run for the best part of a decade as China growth spurred demand for commodities, suffered another year of declines in 2014. The S&P Global Mining Index has fallen each year since 2011. The value of mergers and acquisitions in mining fell for the third consecutive year to $48bn, its lowest level since 2004, according to Dealogic.
“This is a year when many mining companies will be talking about whether there are synergies from bringing their businesses together,” Jeffrey Couch, head of mining and metals for Europe, Middle East and Africa at BMO Capital Markets, said. “Some of the smaller companies will be cash-constrained, and equity capital markets are not supportive of early-stage project mining companies.”
Stephen Davy, head of Emea metals & mining at Credit Suisse, agreed that 2015 could be active.
“I would be surprised if at least one major transaction does not happen,” he said. “Where margins are tight and balance sheets stretched, investors are going to really push for deals that have strong industrial logic and where value can be unlocked.”
Many chief executives are adamant that they are not seeking to buy assets. Several miners made expensive acquisitions during the boom and are under pressure to raise payouts to investors instead.
But bankers said private equity ventures could also deploy money to take advantage of valuations close to a cyclical low.
Mr Davy said: “If ever there was a time when private equity funds could get deals done in mining, it must be now. There has been no equity capital for mining for two years, valuations have been crushed, there are many assets for sale and there are limited strategic buyers for those assets. It’s as close to a perfect storm as I think we’ll see for PE.”
One of the larger such vehicles — X2, headed by Mick Davis, one of the most successful mining bosses during the past decade — has raised $4.8bn of equity commitments and previously considered a deal for assets being spun out of BHP Billiton, the largest miner by market capitalisation.
The largest miners, including BHP, Rio Tinto, Anglo American and Vale, are considered to be in more robust shape than many smaller companies but are restructuring by selling or spinning off non-core assets. Vale is considering a partial initial public offering of its base metals operations.
Glencore, one of the few large miners that has said it could seek deals, sounded out Rio this year about a potential merger and could revisit the idea in 2015. Barrick and Newmont, the two largest gold miners by output, also discussed a combination and may also return to the idea, some analysts think.
Richard Horrocks-Taylor, European head of metals and mining investment banking for RBC Capital Markets, said: “The key thing for the sector is which commodities have stabilised, or will stabilise? If we start to see the bottom in many commodities, we will see increased activity.”
Among the worst performing commodities has been iron ore, with the benchmark price having halved this year. Copper is down 14 per cent and silver has fallen 17 per cent.
