Deloitte: The peak of mining mergers and acquisitions often comes with the peak price

"This is the best era, this is the worst era." Dickens's passage into "Tale of Two Cities" applies equally to the current mining market and companies. On April 15th, Deloitte (DTTL) released the 2015 Global Trend Tracking: Top Ten Challenges for Mining Companies to Face This Year, and the mining companies still need to cope with the challenging market conditions, including price volatility and geopolitics. Turbulence, rising costs and widespread financing channels are scarce.

“There is no doubt that the mining industry is at the bottom of this cycle, and no one can accurately predict when the peak of the next cycle will come,” Deloitte said in the report.

M&A interest transfer

In the past, “China demand” has been an important driving force for the global mining industry. However, as China’s economic growth slows and the growth mode shifts, the demand for mineral products is undergoing structural adjustment. At the same time, global overcapacity has caused the price of mineral products to fall. The investment in resource projects is directly affected.

In the M&A market, the “world-class” mining assets in the market are becoming scarcer, and asset divestiture is dominated for some time. Due to the consideration of financial risks and policy environmental risks, large-scale M&A projects are difficult to find in the market.

This situation is still continuing today.

Take the first half of last year as an example. In the same period, Chinese mining companies are still cautious about overseas mergers and acquisitions. On the one hand, due to the low price of minerals, the urgency of capacity expansion in the whole industry has declined, and the company has focused on capital control and efficiency improvement. The different views of the parties on valuation also lengthen the time to close the deal.

Deloitte believes that the peak of mining mergers and acquisitions often comes with the peak of prices, from 2000 to 2012 is the active period of mergers and acquisitions, but also the range of rising mineral prices. From 2013 to 2014, as the price of mineral products fell, M&A activity decreased accordingly. “In the future, mining M&A activity will also resume its climax as the price of mineral products is boosted.”

On the afternoon of April 15, Deloitte Global Mining M&A leader Shao Jerry said in an interview with the media including the “First Financial Daily” that some overseas mining companies are lowering their valuations as prices fall, and China can seize This price opportunity is for overseas M&A transactions.

He believes that China's overseas mergers and acquisitions as a whole are slowing down, but "from the Chinese government's policy on energy, it still encourages domestic enterprises to obtain more resources overseas. In cross-border mergers and acquisitions, Chinese companies investigate the objects of mergers and acquisitions. Will be more careful, the success rate will increase."

The difference is that overseas iron ore and coal projects that were previously regarded as “sweet” by Chinese companies may no longer be popular, replaced by gold and copper mines.

It is understood that as the steel industry is experiencing overcapacity and transition, the growth rate of iron ore demand has lagged significantly behind production. As of the end of May last year, the nation's imported iron ore port stocks reached 115.88 million tons, a record high. The import price of iron ore has fallen and fell again. At the most severe time, the average import price has fallen below $50. And coal is not good where to go. According to the data disclosed by the China Coal Association, 90 large enterprises in the first two months of this year have lost more than 1.3 billion yuan, and the loss has reached more than 80%, which is trapped in the coal market. The problem of structural excess, coal prices have continued to decline.

In contrast, Chinese companies will increase their acquisitions of overseas copper and gold projects. Taking copper demand expectations as an example, although China's economic growth has slowed down, it will continue to promote urbanization. Copper downstream industries such as construction, transmission infrastructure, automobiles and home appliances will benefit first. From the perspective of supply expectations, global capital tightening, with copper mine projects and professional copper mining companies becoming increasingly scarce, including Rio Tinto's plan to delay the expansion of Mongolia's Oyu Tolgoi copper mine, the copper mine market is expected to create a gap in 2016.

Deloitte said in the report that Chinese companies have begun to lay out gold and copper mines around the world. In the future, driven by stable and strong demand, Chinese companies' enthusiasm for copper mines and gold will continue to increase.

The rise of industry and finance

Deloitte disclosed in the report that due to the continued sluggish market demand, the prices of mineral products have fallen frequently, and the capital chain of mining companies has been constantly escalating. A-share mining listed companies (excluding oil and gas) in 2013, the total amount of cash and equivalents of enterprises at the end of the year was 152.8 billion yuan, down 20% from 2012. On the other hand, the net amount of accounts receivable of enterprises was 17.4 billion yuan, a year-on-year increase of 50%. %.

In addition to the price factor, the repayment pressure brought by the excessive investment in the past, the recovery of goods caused by the difficulties in the operation of the downstream industry, the single financing channel and the bleak capital market are also the reasons for the pressure of corporate funds.

For example, coal enterprises have a high asset-liability ratio when the market situation is good, and the asset-liability ratio is high. Deloitte quotes Bloomberg compiled data. Among the 50 listed coal companies in China, 12 have debt-to-equity ratios exceeding 100%. With new financing, enterprises will face the risk of capital chain breakage, but the financing environment of coal enterprises is not optimistic.

In this context, large mining companies have begun to set up their own investment companies to use financial services to improve internal capital use efficiency and reduce external financing costs, and to support corporate asset acquisition.

According to Deloitte, in April 2014, Huaibei Mining established a finance company to enhance the Group's capital management and investment and financing capabilities. Jiangxi Copper (21.06, -0.40, -1.86%) plans to establish a capital operation center within 3 to 5 years. It is capable of managing 50 billion yuan of financial assets and realizes the operation of the industrial chain, resources and asset stocks. Although China Railway Group is not a traditional mining enterprise, its China Railway Investment has begun to attract social funds or venture capital through market-oriented operation. Participate in the same way and acquire mineral rights by means of fund investment. “In the future, more companies will embark on the road of integration of industry and finance, with a view to using resources and financial integration to achieve resource integration and strategic mergers and acquisitions.”

“2015 may still not be the best time to go public, but it is a good time for companies to carry out value mining.” Deloitte report believes that restructuring business lines through asset divestiture and restructuring, reconfiguring corporate strategic assets, on the one hand, can be restructured The ecological environment of the enterprise capital chain, on the one hand, the possible realization of assets also inject more energy into the company's funds, and the high-quality assets help to enhance the value of the enterprise and prepare for future fundraising in the capital market.

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