EY recently released a report titled “Mergers, acquisitions and capital raising in mining and metals.” It examines what factors affected M&A activity in the iron ore sector in 2014 and takes a look at what the future holds for the base metal in 2015.
M&A activity low in 2014 due to damage control
In 2014, the iron ore space was characterized by sliding prices, oversupply from low-cost producers and uncertainty about future Chinese demand; it’s thus no surprise that deal activity declined that year.
As EY explains, the unstable environment kept deal makers from jumping into high-value deals, with many focusing instead on improving efficiency and optimizing supply chains. Meanwhile, small- to mid-cap companies concentrated on protecting themselves as much as possible through divestments, distressed sales and consolidating/synergistic mergers. The firm states that the average deal value in 2014 was a mere $33 million compared to $225 million in 2013, which speaks to the reluctance felt throughout the iron ore space last year.
In terms of larger companies and pure-play producers, some found it more reasonable to divest certain assets and instead focus on core operations. One example is Cliff Natural Resources’ (NYSE:CLF), which decided to divest its Canadian assets to refocus on its core US-based operations.
Slowly getting back into it
As mentioned, in 2014 there was some consolidation and synergistic mergers among mid tiers. For example, Mamba Minerals merged with Champion Iron (TSX:CIA,ASX:CIA) in March of last year to create a stronger balance sheet and gain the management expertise necessary to get the Fire Lake project in Quebec underway.
EY believes the iron ore space is likely to see more such mergers over the next year as struggling miners look for chances to share risk, increase their ability to source funding and improve their longevity during these difficult times. According to the report, “deal activity in 2015 will likely come from Chinese and Indian companies, particularly SOEs and steelmakers seeking to secure supply abroad. Since these buyers will not be market-driven in the same way that the majors are, they have potential to buy and hold assets on the market at this time without the need to commercialize with immediate return.”
Overall, EY predicts that the majority of M&A activity in the mining sector will be driven by asset divestment as companies reshuffle. Many deals will thus likely be in the form of joint ventures, as companies look to share the costs and risks associated with assessing new markets. For the iron ore sector specifically, EY expects conflicts between the major iron producers and high-cost Chinese producers being resolved and mid-tiers looking to recapitalize their businesses.