Mining M&A should start trucking: Macquarie
Love could be in the air for metals and mining, after a long period of frigidity.
“Corporate activity” in that part of the corporate world sank to a low not seen for ten years in 2015 as commodity prices languished. Investors reassessed their take on Chinese demand – previously viewed as effectively infinite, and worried about the debt of the miners and diggers.
Hardly conducive to corporate romance, that little lot.
But 2016 “could mark the turning point,” Macquarie analysts write in a report on Wednesday. The “nadir for deal firepower” should pass this year, they continue.
Commodities in general reached their lowest point for in more than 20 year in January. Miners tried to fight back by cutting exploration spending, employment levels and output. They also strove to reduce debt.
While that helped raw materials enter a technical bull market just this week, 2008’s commodity price peak is still very far away.
However, there are indeed signs of deals picking up. Anglo American (LON:AAL) has sold off its niobium and phosphates business. Glencore (LON:GLEN) is getting rid of two copper mines and exploring options for a gold mine in Kazakhstan.
Some 143 businesses covered by the bank could be able to make $61 billion in deals this year, it says. That would be well down from 2011’s $332 billion, but the total should rise to $122 billion by 2018, Macquarie says.
What mining producers really want are copper and gold assets, in which case Rio Tinto (LON:RIO) and Barrick Gold (ETS:ABX) may be the big buyers, Macquarie’s analysts write
Rio is one of the few diggers with “significant deal firepower”. It has $11 billion-$16 billion potentially available for a spree, Macquarie says.
Others with the power to splurge are South32 (ASX:S32) in copper, nickel and zinc, BHP Billiton (LON:BLKT) in coal and Mitsui (TYO:8031) in copper and coal, according to Macquarie.
Antofagasta (LON:ANTO) and Sibanye Gold (JSE:SGL) might also feel like getting their wallets out.
However, while bits and pieces of companies may find new homes with others, the chances of a really big mining M&A deal remain quite low. Tie-ups would probably have to be funded by debt, or excess cash, while good assets are in short supply in any case the bank says, and expensively priced.