Mining and metals sector fundamentals continue to be compelling. A rundown in inventories and infrastructure-intensive stimulus packages around the world are likely to contribute to a new rally in the sector.
Ernst & Young’s annual review of mergers, acquisitions and capital raising in the sector, 2008: The year when cash was king, highlights the impact of the global financial crisis on the sector.
“In 2008, the sector went from the heights of optimism to the depths of despair with the sudden and severe collapse in mining and metals prices in the third quarter,” says Ernst & Young Global Mining & Metals Sector Leader Mike Elliott.
“Although the mining sector was the last to be impacted, financing and deals all but dried up in the fourth quarter,” he says.
“Consolidation will continue to be slower in the short to medium term due to financing challenges, but mining and metals companies with strong balance sheets need to be aware of the potential opportunities,” the report suggests.
In 2009, E&Y expects niche deals to increase and a number of smaller US$2 to US$10 billion megadeals involving the mid-tiers. There will also probably be a focus on streamlining operations through the divestment of non-core assets.
Elliott says China-based companies and state-owned enterprises are also actively shopping for once-in-a-lifetime acquisition opportunities in the current market, particularly in low risk markets, such as Australia and Canada.
A sharp reduction in inventories and a bias in global stimulus packages toward metals-intensive infrastructure spending around the world may combine to create a new supply/demand imbalance, pushing up metal prices and deal values.
“Two to three trillion US dollars in economic stimulus packages have been announced around the world over the last few months, and it’s estimated that 30-40% of this will be going into infrastructure. More than 70% of the package planned by China alone is set to be in metals-intensive infrastructure spending,” the report states.
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