Current market conditions are putting mining companies in a quandary investing for the next stage of growth is potentially unpopular with investors but it could prove to be a masterstroke if they want to fully capture the next uplift in the cycle, said Lee Downham, EY Global Mining & Metals Transactions Leader.
Releasing EY's report, Downham said, "Standing still is not an option for the sector as it enters the latter stages of a global supply rebalancing and new competitors try to stake their position."
The comments follow the 10-year transaction lows of 2014, which was the fourth consecutive year of declining M&A activity in the sector. Deal volumes were down 23% year-on-year from 703 in 2013 to 544 in 2014, the lowest volume of deals since 2003. Overall deal value was down 49% year-on-year from USD 87.3 billion in 2013 to USD 44.6 billion in 2014, the lowest since 2004.
Downham said, "Right now, there is no consensus on buy, build or return strategy."
"The current focus on return on capital employed lends itself to short-term decision making, some of which has successfully instilled much-needed discipline across the industry. But given the cyclical characteristics of the sector, and the need to invest significant capital many years ahead of production and earnings, it isn't the only lens that should be used," he added.
"Following the cost reduction programs, internal capital allocation and productivity measures of the past few years, the really successful management teams will be those that have a broader focus on total shareholder return and take the necessary capital decisions today to support long-term value creation."
"This overlooks the huge returns that some acquisitions created earlier in the cycle, and the short payback that a deal, if executed well, may generate overall compared to investing in a portfolio asset," Downham said.
"On the whole, sector-focused funds have patiently and conscientiously refrained from making significant investments in 2014, and this has proven to be the right strategy, given where share prices across the sector ended the year," he said.
"But the compelling equity story underpinning the funds raised is perhaps stronger than ever given equity prices continue to soften across the sector."
While near-term commodity fundamentals are not strong enough to entice the average investor, there are a few shards of light at the end of the tunnel” for capital availability, according to Downham.
"It is reasonable to assume that the gradual positive effect of supply corrections and margin improvement across the producers will encourage investment demand for quality growth opportunities in the sector after a long absence of investment," he added.
