Big Six firm sees these factors driving M&A in the mining sector

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Herbert Smith Freehills predicts that a number of factors, including higher commodity prices and continued interest in divestments, will likely drive mergers and acquisitions in Australia’s mining industry this year.

The value of public mining M&A in 2016 slumped about 33% despite a 25% increase in deal volume, the top firm said in its Asia Pacific M&A Review 2017 report. Last year, there were only two transactions valued at more than $100m in Australian public M&A involving companies with mining assets.

HSF says that a rally in commodity prices last year, lower production costs, and the Australian dollar will likely be a catalyst for the sector this year as they spur confidence and get miners refocused on growth plans. The firm projects that miners will prefer growth through acquisitions of existing operations for the short term, as volatility is still a risk in the long term, particularly in bulk commodities.

While some miners will focus on M&A for growth, some will also continue with divestments as part of longer-term strategic goals for streamlining and regenerating asset portfolios. The trend will produce opportunities for smaller, single-asset or pure-play companies, it said.

HSF sees coal, gold, and copper, and to a lesser extent bauxite, as commodities to watch. It also predicts that private equity activity will continue to drive M&A in the mining sector in 2017, though it said that these firms will continue to be “judicious in deploying capital.” They also see the possibility of more private equities exiting positions in mining companies as IPO’s in the sector may increase driven by recent price improvements.

The firm also said that there is a strong likelihood for collaborative transactions and innovative deal structures to accommodate specific mining operations aspects and to bridge price expectation gaps between buyers and sellers.

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