A seemingly “unbridgeable valuation gap” between buyers and sellers continues to stymie big merger activity in the mining sector

November 3, 2013 3:46 pm

Mining valuation gap blocks big mergers

By Neil Hume, Commodities Editor

A seemingly “unbridgeable valuation gap” between buyers and sellers continues to stymie big merger activity in the mining sector while private capital has emerged as a growing force in dealmaking. A total of 165 deals worth only $8bn were completed in the three months to September, down from 236 deals worth $20bn in the same period a year ago, according to figures from consultants E&Y.“Sellers do not need to sell urgently and buyers remain cautious, creating significant deal inertia,” said Lee Downham of E&Y.

The lack of activity in metals and mining is in contrast to telecoms, media and technology sectors in which there has been a flurry of dealmaking activity this year including Verizon’s $130bn deal to acquire Vodafone’s stake in their US wireless joint venture.

Excluding the Glencore Xstrata deal, which closed in May, the value of transactions in the mining sector has fallen by 22 per cent to $59.5bn in nine months to September.

After writing off billions of dollars on ill-timed acquisitions and over-ambitious projects the world’s biggest mining companies are shunning M&A and focusing on improving productivity and driving down costs.

They are also looking to reduce debts by selling non-core assets. Last week, Rio Tintodisposed of its stake in Australia’s third biggest thermal coal mine to Glencore Xstrata and Sumitomo in a deal worth slightly more than $1bn.

“Much of the mining and metals sector remains cautious and introspective, and this is reflected in the low risk and predominately domestic nature of deals being done,“ said Mr Downham.

The downturn in mining M&A comes as private equity investors take aim at the industry. This year nearly $25bn of cash has been raised for funds dedicated to investments in natural resources, according to separate data compiled by Preqin.

Private equity houses have turned to some of the biggest names in the resource industry in order to bolster their presence in the sector.

TPG and Noble, the commodities trading house, have committed $1bn to a new mining investment run by Mick Davis, the former chief executive of Xstrata. Aaron Regent, former chief executive of Barrick Gold, and Roger Agnelli, ex-boss of Vale, are also on the hunt for assets, backed by funds and banks.

Financial investors’ share of total deal value has quadrupled in the nine months to September– accounting for 18 per cent compared with 5 per cent in 2012, according to E&Y.

“The push by private capital into the mining sector is gathering momentum,” said Mr Downham. “While it’s only just beginning to be evident in deal numbers, perhaps more telling are the regular announcements by funds that capital has been secured. We will increasingly see the deployment of this capital over the next couple of years.”

However, many bankers and fund managers believe these vehicles will find it difficult to complete large transactions. That is because big mining companies are under little pressure to dispose of assets.