The mining industry needs to be "more disciplined" in its decision-making process when considering takeover targets. This was one of the conclusions in a presentation by John Welborn, the CEO of Resolute Mining Ltd, at the Mines and Money conference in London (MML) at the end of November. Welborn noted that one-third of the value of mergers and acquisitions (M&A) by the leading 40 mining companies over the past decade had been subsequently written off.
This value destruction was also mentioned by Thomas Holl, the portfolio manager of natural resources at BlackRock. During an interview with Jamie Strauss of Digbee, Holl described a welcome shift in attitude towards the price impact of additional production, rather than the usual assumption ten years ago that all incremental metal output would be absorbed. Markets, he said, are "finely balanced", and supply shocks can trigger significant price reactions.
Holl was amongst several presenters at MML to observe that 'generalist' investors don't like the capital-intensive nature, and price cyclicality, of mining, which inevitably leads to a low return on capital employed. Nevertheless, Peter Grosskopf, the CEO of Sprott Inc., talked of a "dichotomy" in investment, with a lack of interest in junior companies, while Anglo Pacific Group's Julian Treger stressed the "challenging" conditions for the exploration sector because of the "risk-off attitude" of investors.
Michael White, the president of IBK Capital, told MML delegates "money is coming back", and even some early-stage projects are being financed. This investment is very selective, but he believes we are "heading into a bull market".
At the moment, however, most financing in the mining industry is being used for debt restructuring rather than investment. A recent report from S&P Global Market Intelligence (SPGMI) calculated that financing announced during the three months to end-September jumped to US$11.4 billion. This compares with US$9.8 billion in the June quarter and only US$4.4 billion in the year-ago period.
Almost all of the September quarter's fund raising occurred in the last month of the quarter, and SPGMI attributed the increase to companies taking advantage of low interest rates to restructure their debt. This included huge debt issues by Codelco, Newmont and Freeport McMoran on the New York stock exchange. Indeed, only US$3.8 billion of the total could be attributed to identifiable regional targets — of those that could, Africa and Latin America accounted for almost half of the total.
Certainly not much of the financing could be attributed to M&A. According to SPGMI, M&A activity in the three months to end-September fell for the second successive quarter, totalling only US$1.7 billion. The number of deals was near the four-year average of 38 deals per quarter, but the average value was the lowest ever recorded by SPGMI at US$43 million and gold deals accounted for over 80% of the total.
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