M&A to increase in coal, gold; bauxite can see improved activity

Coal and gold sectors could witness a rise in mergers and acquisitions this year, according to a research by Herbert Smith Freehills. The professional services firm said factors including, but not limited to, commodity prices, lower production costs and Australian dollar will be crucial in raising the levels of M&A for 2017.

In its annual Asia Pacific M&A report, Herbert Smith Freehills highlighted the possible growth in M&A. “We anticipate more M&A activity as miners, having achieved significant cost and debt reductions and having improved profitability (and in some cases being net cash), refocus on their growth plans,” the firm said in its report.

“Confidence levels in long-term pricing have improved but volatility is still a consideration, particularly in bulk commodities,” the report added. “We therefore expect that at least in the short term, this will drive miners to prefer growth through acquisitions of existing operations rather than organic growth through developing new operations.”

The news comes as exports of minerals like nickel and bauxite could be impacted by the changes made in Indonesia’s mining policy, as was reported in January. As part of the move, Indonesia has lifted a three-year ban on exports of nickel ore and bauxite. According to Bloomberg, excessive exportation of the minerals will be allowed from companies that build processing plants in Indonesia.

Coal and gold sectors will witness continued M&A engagement. Copper and bauxite will also offer buyers reasons to feel joyous ahead of increasing activity in these sectors, allowing them to get exposure at current prices. “The challenge in consummating deals will be achieving a match on price expectations in an improving commodity price environment,” the report stated.

The M&A activity concerning the mining industry fared rather poorly in 2016, the firm said. The second half of 2016 saw a rise in the prices of metallurgical coal. As a result of this, completing M&A transactions was heavily affected, the firm said.

The value of public deals fell by as much as a third in comparison to 2015. Nevertheless, the number of mining deals escalated by a quarter in 2016 in contrast to the previous year. A large portion of these deals were announced in the second half of 2016.

“In 2016, mining M&A transactions fell into three categories,” Herbert Smith Freehills reported. “First, major miners divesting assets, particularly metallurgical and thermal coal assets, via private M&A auction processes. Secondly, sales of mid or small size operating gold and/or copper assets. Thirdly, sales of exploration assets or undeveloped mining leases (particularly in metallurgical coal).”