[miningmx.com] – A SHORTAGE of debt finance to all but the largest mining companies would accelerate merger and acquisition activity in the resources sector and may even encourage $18bn in investment by private equity funds, said Standard Bank.
“Owing to funding challenges this year to all but the most robust companies, and with debt markets being so expensive, we expect there to be more M&A this year,” said Rajat Kohli, global head of mining and metals for Standard Bank in London.
“They could be as simple as joint ventures to full scale public mergers,” he said. “It will be easy to announce these transactions, but probably difficult to close them,” Kohli added. “But the buyer seller price gap will narrow,” he said.
Some $45bn was invested in 544 transactions in the mining sector during 2014, the lowest since the $60bn completed in 2009, the year after the financial and economic crisis, according to data provided by Standard Bank.
This compares to $160bn in transactions conducted in 2011. During 2013, $87bn was invested in 702 transactions.
“There is quite a lot of private capital waiting in the wings,” said Kohli. “What may make them [private equity funds] more prominent this year is that public equity and debt markets are more challenging,” he said.
“Secondly, valuations have fallen and I feel we’re in a trough. This encourages private capital to have a more realistic go at these assets,” he said. Kohli estimated that of the $20bn put into private equity for mining, only $2bn had been deployed so far.
Standard Bank believed the commodity markets would remain tight in 2015 having failed to improve last year as the bank forecast.
Debt levels in the market had “held up” as mining firms sought to refinance their strained balance sheets, but there was only a modest recovery in equity issuances as investors shied away from the sector.
“Investors have been disappointed by mining sector with many projects over-capitalised especially in the gold sector which is reflected in performance of gold equities,” said Kohli.
“There has been more gold issuance this year than in first ten to 11 months of last year, but the basic message is that investors remain cautious of sector and money continues to be rotated out of it in favour of sectors such as telecommunications.”
Equity investment in the mining sector in 2015 increased marginally to $42bn compared to $37bn in 2013 and $30bn in 2012, the year Kohli said represented the end of the 12-year bull market for metals.
“The reality is that the bull market from 2000 to middle of 2012 was almost entirely driven by China,” said Kohli. “Once GDP growth rate started to moderate (c.7%) it started to affect growth levels of demand out of China, and more importantly sentiment in the sector. China remains pre-eminent driver of demand,” he said.
However, mining CEOs would show fresh confidence to transact in the market this year, said Kohli who added he believed there could be more activity in the gold sector. Gold was a metal about which Standard Bank was most bullish.
“It will be another cautious year, but we are positive on gold given the difficult macroeconomic factors,” said Kohli.
Said Walter de Wet, a commodities analyst for Standard Bank: “I think the dollar will continue to strengthen substantially, but in Euro and Rand terms, the gold price is not that bad”.
“For platinum group metals it will still be a tough year in 2015 with negative falling investment demand,” said De Wet who estimated a platinum price average of about $1,400 per ounce next year, and $1,300/oz this year. The static nature of platinum this year was owing to significant above-ground stocks.
De Wet estimated that platinum inventories stood at about 15 million oz, although the definition of inventory was broad and included metal-in-process stock and two million to 3.5 million oz held in exchange traded funds. In terms of what is available to market it is closer to 7 million to 8 million oz, he said.
