In a report titled “Mergers, acquisitions and capital raising in mining and metals,” EY takes a look at what’s been happening in the coal space over the past year and what might be in store for 2015.
2014 was another tough year for the mining sector overall, but both thermal and metallurgical coal, as well as iron ore, were particularly badly hit by weak price environments. As a result, the amount of deal activity declined for the sector for the fourth consecutive year, according to the firm.
In total, $44.6 billion worth of deals were completed in the metals and mining space, down 49 percent from 2013. For the year, 544 deals were closed, down 23 percent from the previous year.
Other factors contributing to the decrease in M&A activity include short-term approaches to investment and a focus by major producers on “looking internally, rather than externally, for growth opportunities.” However, EY suggests that things need to change. ”[A] shift in focus toward longer-term growth and value creation is required if companies are to position themselves competitively to take advantage of the global supply rebalancing,” it states in its report.
For coal specifically, EY notes that oversupply and low prices have left those in the market “anxious and under financial stress.” That’s meant that most transactions have been divestments, with some high-cost assets garnering little to no interest from buyers. To top it off, the firm believes that a recovery is still a ways away for both thermal and metallurgical coal prices, although metallurgical could see a bit more of an imminent recovery.
That doesn’t sound like great news for the space, and EY certainly isn’t the only entity making such predictions. However, it does note that there’s a bright side — for those with financial means, the current coal situation could provide opportunity.
“The outcome of this is a boon for opportunistic acquirers who can enter the market targeting potentially high-quality assets at low prices,” the firm notes. It suggests that smaller buyers backed by private capital or institutional funds are starting to make moves in the space while distressed assets are on the table.
Take, for example, Corsa Coal (TSXV:CSO), which acquired PBS Coals, owned by Russia’s Severstal (MCX:CHMF), for $60 million last year. EY notes that the company is 55-percent owned by Quintana Capital Group, a private equity firm. Similarly, Ambre Energy will sell its North American Coal operations to Resource Capital Funds for $18 million.
On the flip side, challenging market conditions in the US have already driven larger companies such as Walter Energy (NYSE:WLT), Cliffs Natural Resources (NYSE:CLF) and CONSOL Energy (NYSE:CNX) to put assets up for sale.
Going forward, EY sees activity accelerating in the space in 2015. With “previously inaccessible assets” now on the market, the situation certainly presents an interesting opportunity for those interested.
“Asset valuations have been reset at lower levels, providing investors with capital to deploy,” the firm concludes. “Explorers are both consolidating to gain balance sheet strength and taking advantage of low prices to secure quality assets.”