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Linda Beal says M&A in the African mining sector is set to take off
As I and Grant Thornton colleagues attend Investing in African Mining Conference 'Indaba 2015' in Cape Town this week, thoughts turn to the health of the African regional mining sector. While the industry is certainly not the bedrock of economies that it has been, I see a healthier mid-term future.
The African mining sector has undergone serious turmoil over the past few years including industrial action, oversupply of commodities and declining market prices. However, as we see on the ground, and highlighted in our recent 'Gathering momentum: The resurgence of M&A in global mining', a near perfect alignment of factors globally is heralding a new era in mining mergers and acquisitions.
Drawing on the insight of more than 250 senior mining executives globally the report found that one-in-ten junior miners globally expects to enter administration while a quarter of major mining companies anticipate challenges with financial covenants. This is expected to introduce significant quantities of distressed assets and low valuations. A third of executives at both junior and major mining companies around the world say they are likely to make an acquisition, with an almost equal number indicating they are likely to sell assets.
The falling commodity prices have also been cited as a driver for M&A activity as companies look to consolidate assets to realise scale, lower productions costs and band together to create effectiveness of scale and to reduce overheads. Worldwide, the value of deal activity announced (Thomson OneSource) in mining increased from $87 billion in 2013 to over $138 billion by the end of 2014.
Despite the recent turmoil, African mineral riches remain attractive to miners and investors who are able to execute strategies that aim to minimise costs and maximise the long-term returns these assets will invariably deliver. We continue to see keen interest from Chinese clients to acquire mining assets in Africa, spurred on by the low valuations.
At Indaba, I look forward to hearing more and discussing how mining executives can position their businesses as attractive for buyers or sellers, developing strategies to access funding by exploring alternative sources such as earn-in and funded related joint venture arrangements as well as the traditional bond market. Key to this will be the need to drive cost efficiencies and productivity improvements to enhance the likelihood of attracting funding or optimal valuations. The commodity supercycle may have ended but the African mining industry can still be optimistic for future growth.