There is increased financial investor interest in the junior mining space in emerging markets, especially in Africa, from resource-focused private-equity-investment providers, says professional services firm Ernst and Young (EY) head of transaction advisory services for Africa Sandile Hlophe.
Hlophe says financial investors and private equity-backed alternative capital providers, including high-net-worth individuals and investment banks, were particularly active in the mergers and acquisitions (M&As) market in the first half of 2014, driven by expected longer-term commodity price recovery and the ability to leverage management ability.
This active involvement can also be attributed to financial investors aiming to build up sizeable resources platforms for an easy exit to strategic majors in the next five to seven years, when the resource market improves and mining majors embark on acquisitive expansion.
“Several private-equity funds have raised resources-focused funds and I expect increased deployment of these funds into resources assets this year. I also estimate that these investors have more than $10b (N$104.8b) in deal capacity for the sector. Therefore, some big deals are expected to be made in the sector over the next year,” says Hlophe.
The deals are likely to be focused on low-risk geographies and on leveraging underperforming assets using technical, operational and financial influence to generate better returns.
The African Mining Network’s bimonthly event, held in Johannesburg, South Africa last month, found the reason for the collapse of mining capital markets was the breakdown in confidence in the junior mining sector.
Statistics indicate 75% of mining initial public offerings (IPOs), over the past few years, are failing while the average loss over the past five years is 30%, with the 2010/11 IPOs trading at an average loss of 50%.
In addition, capital expenditure overruns are another significant reason for the breakdown in capital mining markets. Statistics show over the past five years, there has been an average of 56% in capital overruns in the mining industry.
Private-equity information and analysis firm, Pangea Exploration, chairperson and CEO, Rob Still says: “This has a negative influence on the returns of mining projects and could also be the reason for a lack of IPOs and for the crisis in confidence in the junior mining sector.”
According to him, the implications of the crisis in the mining capital markets would likely result in a declining number of junior miners worldwide, down round financing, as well as mergers and asset sales.
EY’s ‘Mergers, Acquisitions and Capital Raising in Mining and Metals: 2013 Trends, 2014 Outlook’ report released last month, shows while deal volumes and value were down 25% and 16% year-on-year to 702 deals (excluding the all-share Xstrata-Glencore merger) and $87.3b (N$916b) respectively, a steady improvement in global market conditions should result in a gradual return to deal making in the mining and metals sector in 2014, off the back of a seven-year low in global M&A volumes in 2013.
The report also highlights 70, or 3%, of the 703 deals worldwide (including the Xstrata-Glencore merger) were Africa-focused, at a deal value of $3.2b (N$33.5b), of which $1.6b (N$16.7b) constituted deal activity in South Africa.
This N$33.5b is, however, a decrease of 16% in deal value and a decrease of 2% in deal volume year-on-year in Africa.
Further, the report suggests Switzerland, the UK and Canada were the top three acquirers of African mining deals in 2013.
The Democratic Republic of Congo (DRC) was the leading African country in deal value, at $430m (N$43b), with South Africa reaching $397m (N$39.7b).
The report also states copper and gold were the leading target commodities for inbound deals across Africa while coal was the leading target commodity in South Africa, with 49% of the deals based on value, owing to increased demand for energy in that country and other emerging markets such as Namibia.
Global private-equity investment institution, Warburg Pincus, financial services firm JPMorgan and private-equity firm, Actis, are targeting second-tier and junior miners in Africa, as a result of the current depressed asset prices.
Hlophe believes the resource- and infrastructure-related and related services-focused private-equity structures these institutions provide are ideal for Africa, as much of the investment required in the resources space is used to establish much-needed infrastructure for mining projects.
EY expects to see a greater proportion of the mining sector’s funding coming from equity through follow-on raisings during 2014 and a stronger appetite from debt providers, improving access to leveraged loans for high-quality mid-tier miners and developers.
There were limited IPOs and limited fundraising through public listings last year and EY expects this trend to continue.
“I expect fewer IPOs to be launched as a means to raise equity in the short-term, with more private placements and a lot of project finance-type funding through investment banks,” says Hlophe. - additional reporting by miningweekly.com