Mergers on the slide, yet all is not lost: EY

Resources Corner

Merger and acquisition activity across Australia has fallen by 76 per cent to $3.6 billion in 2013, according to a report released by accounting and advisory group EY.  Between January and September, 136 mining and metals related deals occurred in the country, down 21 per cent on the corresponding period in 2012, and including just one ‘mega deal,’ a $US82 billion union of the giants between Glencore and Xstrata. This compares with 12 sizeable deals in the first half, clearly reflecting a decline as falling commodity prices and uncertain Chinese demand spiked investor caution about resources companies at every level. Despite this, EY Asia-Pacific mining and metals transaction leader Paul Murphy says opportunity exists for alternative finance and private capital amid signs of rejuvenated activity out of China. Despite the falling figures, it was Chinese buying that accounted for 60 per cent of inbound investment over the first three quarters of this year and over a third of total deal activity in Australia, according to Mr Murphy. He says that while small and mid-sized miners have been starved of capital and compelled to stretch out their cash to survive in recent times, there will come a time soon when they are forced to sell assets or find new partners to deliver capital. 
 
The report revealed that coal was the most desired Australian commodity according to outbound deals by value, however a considerable dispersion exists the expectations of owners and the budgets available to buyers. Mr Murphy says that globally as well as in Australia, a ‘seemingly unbridgeable’ valuation gap which continues to stymie deals. EY expects volatility in commodity prices to continue and has called for buyers to pursue flexibility in the assets they acquire. According to Mr Murphy, investors should ‘... seek to understand where value is being created through the introduction of greater production flexibility in assets they are assessing for acquisition because it (they) may uncover hidden value.” In total, between January and September, 537 deals were closed worldwide, with a total value of $US96.9 billion. The top destination for outbound deals by value was South Africa.
 
Economic news
 
The RBA released its November board meeting minutes this week, pointing once again to the slower than anticipated decline of the mining sector-
 
“...The pace of growth in China had increased a little through the year and was consistent with the Chinese Government's target of 7½ per cent. Consumption and investment spending continued to grow strongly, with the latter contributing to strong demand for resources imports.”
 
“...While investment in the mining industry had declined, resources exports, particularly of iron ore, had been growing strongly as more projects were completed.”
 
Resource company headlines
 
BHP Billiton Limited (ASX:BHP) boss Andrew Mackenzie says Chinese demand for Australia's natural resources may prove to be stronger than first thought, according to media reports. Speaking at the opening of the mining giant's new headquarters in Melbourne, Mr Mackenzie reportedly said the Chinese government's recent economic policy summit was positive for Australia’s mining industry. Mr Mackenzie had not previously shared his view of the recent third plenary session in China.
 
Silver Lake Resources Limited (ASX:SLR) has hit a milestone, producing 500 thousand ounces of gold bullion from its operation since its maiden pour in 2008.  Gold produced has come from three processing facilities in West Australia; Mount Monger with 80 per cent, Randalls with 13 per cent and Murchison with 7 per cent.  Managing Director Les Davis says Silver Lake has grown its resource base to 6.4 million ounces, including 1.7 million ounces of reserve. So far in fiscal 2014, the company has produced 96,400 ounces.
 
Yancoal Australia Limited (ASX:YAL) has responded to media speculation that the Foreign Investment Review Board has knocked back an application from Yanzhou Coal to waive conditions that it list 30 per cent of Yancoal by the end of the year. The Independent Board Committee (IBC) of Yancoal says it is unaware of any decision by the review board in relation to any application that Yanzhou may have made. The committee has reassured shareholders that the review board in not a decision making body but merely makes recommendations to the treasurer in relation to foreign investment proposals.
 
Mozambi Coal’s Limited (ASX:MOZ) subsidiary has acquired two coal exploration licences from Rio Tinto Limited (ASX:RIO) subsidiary Rio Tinto Exploration Pty Ltd in Queensland. Mozambi says it paid Rio Tinto Exploration an initial $375,000 plus GST in cash, with additional milestone payments of up to a further $3 million due on delineation of a measured resource over 50 million tonnes and on commencement of export shipments. One of the licences is in the Bowen Basin with untested potential for metallurgical coal and is next to existing infrastructure, while the other is next to the Styx Basin and considered to be greenfields.
 
Rio Tinto Limited (ASX:RIO) says financing of the Oyu Tolgoi expansion in Mongolia has been delayed indefinitely. The global mining giant says ongoing negotiations with the Mongolian Government remained unresolved, meaning that its effort to raise $US4 billion for the second stage of the mine could not be completed in the near term. The Rio subsidiary in charge of the project - Turquoise Hill Resources - will now undertake a rights issue to sustain itself, and Rio will extend a bridging loan out to January. Rio will underwrite the rights issue, meaning it is likely to increase its stake in Turquoise Hill and therefore the giant copper and gold mine. The second stage of the project has been caught up in dispute for some time, with Mongolia wanting a bigger slice of the wealth from the mine.
 
Downer EDI Limited (ASX:DOW) has secured a four-and-a-half year, half a billion dollar contract for mining services at the Roy Hill iron ore mine in the Pilbara. Downer says the contract will see it begin infrastructure construction initially, while Roy Hill will be predominantly undertaking mining on an owner-operator basis. The contract is expected to be executed by the end of November and is values at an estimate of $500 million. The company says the capital required for the project will be about $110 million.
 
Newcrest Mining Limited (ASX:NCM) announced the departure of yet another senior executive, with company secretary Scott Langford moving on after less than 20 months in the role. Mr Langford joins chairman Don Mercer, chief executive Greg Robinson and many other senior project workers in departing the gold miner during a forgettable year. Investors lost confidence in Newcrest after gold production guidance was repeatedly missed, and the company then lurched into crisis in June when a market disclosure scandal erupted. Newcrest says Mr Langford was leaving for personal and family reasons and intended to take an extended break from work. His deputy Peter Larsen will assume the role in the interim, until a replacement is found.