Thursday, March 27, 2014

Ernst & Young Reports Mining Market Bottomed Out In 2013

Changes in the 2014 mining marketplace have created a new North American sector that appears to be rife with opportunities for nontraditional investors.

According to a recently released report by Ernst & Young, 2014 should bring a gradual strengthening of mining and metals equity valuations and increased availability of capital. The report suggests that the market hit bottom in 2013 and can only go up from its current low point.

U.S. private equity firm Warburg Pincus, which recently appointed ArcelorMittal’s former mining head, Peter Kukielski, as “executive in residence” to aid its plan to buy non-core assets from natural resource groups, would seem to be positioning itself to take advantage of the investment opportunity.

Kukielski has already identified non-core assets at natural resources groups under pressure from subdued commodity prices, which might be read as describing the current state of most mining operations. The de-valued prices for the mining operations could bring significant investment capital to companies that have struggled to maintain operations levels, let alone invest in building up operations.

EY’s global mining & metals transactions leader, Lee Downham, said the foundations have been laid for a gradual return to mergers and acquisitions (M&A) in 2014.

“Confidence in the global economy continues to improve, larger companies have stronger balance sheets, and the focus on productivity and efficiency should begin to yield margin improvements. This should provide a better environment for both deal making and capital raising,” said Downham.

The continued rise of private capital, including the increased share of M&A undertaken by financial investors (by value) from 5% in 2012 to 19% in 2013, supports the view we are at a “tipping point”, the report said.

But last year was dire with the lowest number of deals in the sector since 2006 and the lowest global deal value since 2009. An investment by Warburg Pincus in mining would be its first since 1988.