Increased African Mining Deals Show Normalization, 2017 Outlook Positive

By Dana Sanchez Published: February 21, 2017, 9:52 am
increased African mining dealsFreeport-McMoRan sold its Tenke Fungurume mine (DRC) in 2016. Photo: Mining Review Africa

The surprisingly strong bull market in commodity prices in 2016 contributed to increased activity in mining and metals deals in Africa, says Quintin Hobbs, Africa mining and metals transactions leader at Ernst & Young.

Organizations ran leaner and more efficient, with stronger balance sheets. “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 normalization in activity,” Hobbs said, according to Reuters.

The outlook improved so significantly through the course of the year, that the predicted level of divestments and assets listed at rock-bottom prices at the beginning of 2016 just didn’t materialize, another expert said.

From Business Day Online. Story by Kay Ugwuede/Reuters.

While global mining and metals deals volume fell by 9 percent year-on-year to US$44.3 billion in 2016, the lowest level since 2004, Africa has recorded growth of 62 percent year-on-year, seeing deal volume increase three fold to US$5, 818 million in 2016 according to Ernst & Young quarterly report on mergers, acquisitions and capital raising in the mining and metals sector.

In a release made available to BusinessDay, the professional services firm stated that in South Africa, deal volume increased 78 percent year-on-year, whilst deal value increased fourfold in 2016.

Quintin Hobbs, Africa mining and metals transactions leader at EY, says: “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. 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 normalization in activity.”

Platinum Group Metals PGM transactions drove South African deal value. Platinum comprised of the top two deals in South Africa for the year, making up half of the deal value for 2016. Sibanye was the acquirer in both of these transactions. Copper and steel made up for the top two deals by value for Africa.

Hobbs says: “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.”

China more than doubled the value of domestic and cross-border acquisitions it made globally in 2016. Four of the top 10 deals in the sector were undertaken by Chinese acquirers. China Molybdenum’s activities alone accounted for US$4.3 billion worth of acquisitions just under 10 percent of the overall deal value in the sector.

Two of the top 10 deal deals by value were undertaken by China in cross-border transactions within Africa.

In 2016, capital raised in China also doubled to US$100 billion 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 percent increase to US$249 billion in total capital raised (excluding China, global capital raised declined by 16 percent to US$149 billion).

Hobbs says: The discipline developed through 2015-2016 will continue with a focus on cost optimization, balance sheet agility and productivity, limiting the amount of capital available for future growth projects.

“The outlook for mining M&A in Africa in 2017 remains positive and the trend of portfolio optimization is likely to continue to drive transaction flow this year.”

Lee Downham, EY Global Mining & Metals Transactions Leader, says: “Ongoing volatility and an ever-changing macroeconomic environment made executing deals extremely difficult in the mining and metals sector in 2016.

The level of divestments and assets listed at rock-bottom prices predicted at the outset of the year just didn’t materialize 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, including the completion of Alcoa’s Arconic spin-off of its downstream operations and Phoenix, Arizona-based Freeport-McMoRan’s sale of its Tenke Fungurume mine (DRC). Together, these deals represent 14 percent (US$6b) of total deal value in 2016.

(New York City-based Alcoa Corporation completed separation from its parent company Alcoa Inc. — now named Arconic Inc. — and began operating as an independent, publicly-traded company listed on the New York Stock Exchange, Street Insider reported. Alcoa Corporation deals in bauxite, alumina and aluminum products.)

Divestment activity also helped a number of mid-tier mining companies to consolidate their positions this year, with Toronto-based Kinross Gold, Stockholm-based Boliden and New Hope (Australia) 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.

Read more at Business Day Online.

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