Bottom of the cycle. Perfect conditions for deal making?

Transcription

1 Bottom of the cycle. Perfect conditions for deal making? Jonathan Lee and Jacqueline Chow

2 Agenda 1. Food for thought recent trends in global mining deals 2. How is the metals sector reacting? 3. Where the capital is coming from? 4. What will the triggers be for the start of the M&A up-turn? Your presenters Jonathan Lee, Mining and metals deals specialists Jacqueline Chow, Natural Resources valuations specialist Slide 2

3 Food for thought Slide 3

4 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Share price (Indexed to 100) FY16 rebound grounds for optimism? Indexed FTSE 100 Mining share prices AAL BHP GLN RIO FTSE Index FTSE Mining Index Slide 4

5 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 $m Number Majors shedding non-core assets increasing deal volumes. Values remain depressed or at a new normal? Global mining deals by volume and value 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Year Value $m Volume ('k) Avg. deal size (when reported $m/deal) FY12 111,357 1, FY13 42,793 1, FY14 47,534 1, FY15 46, LTM-16 40,346 1, YTD-16 16, Source: DealLogic Value Volume LTM volume Slide 5

6 $bn Deal count Normal size deals are increasing in number slowly but average value has dropped markedly in the last 9 months Deal value <$500m Value Volume Rolling LTM volume avg. $m Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Average deal size Slide 6

7 M&A acquirer activity is being driven by entities based in China and Russia Deal value LTM May-16: $3.9bn Polyus Gold International Ltd Deal value LTM May-16: $10.7bn Morenci Copper Mine Deal value by acquiror nationality since Jan-15 Australia 20% 23% China 10% 10% 17% 20% Russian Federation United States Canada Other Deal value LTM May-16: $3.4bn Tenke Copper Project Deal value LTM May-16: $10.9bn Deal value LTM (exc South32) May-16: $4.1n Slide 7

8 With a significant targets in North America and Russia and comparatively few in Latin America and Australia Deal value LTM May-16: $4.1bn Deal value LTM May-16: $10.4bn Deal value LTM May-16: $5.6bn Deal value LTM May-16: $4.8bn Deal value LTM May-16: $1.3bn Deal value LTM May-16: $1.7bn Deal value LTM May-16: $1.3bn Deal value LTM May-16: $2.8bn Deal value LTM May-16: $2.9bn Slide 8

9 The size of mega deals has been re-set (>$1bn deal value) Announced Target Acquiror Deal Value Commodity Completed Date $ (bn) Date Mar-15 Foresight Energy GP LLP Murray Energy Corp 1.4 Thermal coal Apl-16 United States May-15 South32 Ltd Existing Shareholders 9.4 Diversified May-15 Various Southern Hempisphere May-15 Boldtumur Eruu Gol LLC; Zhongrun Resources 1.9 Iron Ore Dec-15 Mongolia Investment Corp Jul-15 MBR (Vale) (36.4%) Banco Bradesco SA 1.2 Iron Ore Sep-15 Brazil Jul-15 CMZ (Barrick Gold) (50%) Antofagasta plc 1.0 Copper Dec-15 Chile Sep-15 Polyus Gold (59.78%) Wandle Holdings Ltd 6.1 Gold Nov-15 Russia Feb-16 Morenci (Freeport McMoran) (13%) Sumitomo 1.0 Copper May-16 United States Mar-16 Polyus Gold (32.308%) Polyus Gold OAO (share 3.5 Gold May-16 Russia buy back) May-16 Tenke (Freeport McMoran) (56%) DRC China Molybdenum Co Ltd 2.8 Copper Q4 FY16 Slide 9

10 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Gold and silver transaction domination deal value evidence of the need for commodity price stability Percentage of deals by type: volume 100% 14% 13% 16% 11% 11% 10% 10% 9% 8% 6% 75% 13% 18% 16% 15% 9% 5% 14% 8% 50% 14% 10% 16% 10% 25% 40% 24% 25% 33% 35% 26% 33% 30% 0% FY12 FY13 FY14 FY15 FY16 Gold & silver Iron ore Coal Copper, Nickel, Lead and Zinc Other metal ore Other Percentage of deals by type: value Rebased commodity prices % 75% 50% 25% 0% 7% 5% 14% 5% 3% 1% 17% 8% 5% 24% 27% 47% 16% 32% 9% 11% 13% 13% 33% 11% 15% 14% 10% 9% 10% 36% 45% 16% 20% 22% FY12 FY13 FY14 FY15 FY Gold & silver Iron ore Coal Copper, Nickel, Lead and Zinc Other metal ore Other Thermal Coal Copper 62% Iron Ore Gold Slide 10

11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 $m Deals US$/Oz Recent gold equity raises on the AIM market mirror the global rise in gold transactions in H1 FY16 Gold price forecast $/Oz (nominal) 1,500 1,400 1,300 1,200 1,100 Deals under $500m - gold and silver 1,800 1,600 1,400 1,200 1, , FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY Low Range Annual avg. spot CapIQ Forward curve Brokers Median Value Volume LTM (volume) Slide 11

12 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 US$/tonne $m Deals Of 491 iron ore transactions in FY15 and YTD16, 212 were for $1m or less Iron Ore price forecast $/tonne (nominal) Deals under $500m - iron ore 1, , FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY Low Range CapIQ Forward curve Annual avg. spot Brokers Median Value Volume LTM (volume) Slide 12

13 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 US$/tonne $m Whilst investor sentiment for base metals is strong, actual deal activity is reducing Copper price forecast $/tonne (nominal) 9,000 8,000 7,000 6,000 5,000 4,000 Deals under $500m - base metals 1,400 1,200 1, ,000 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY Broker 50% interquartile range CapIQ Forward curve Annual avg. spot Brokers Median Value Volume LTM (volume) Slide 13

14 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Currency vs USD (Indexed to 100) And finally.foreign exchange rebased to 1-Jan-12 FX rates with mining significant mining exposures Rand, Real and Rouble all strengthened in YTD The Chinese Yuan has been kept at parity with the USD AUD BRZ CAD CLP RMB RUB ZAR Slide 14

15 How is the metals sector reacting? Slide 15

16 Metals value chain Slide 16

17 The Steel market US is acting decisively, swiftly and at a level that stops China dumping steel with impunity We have no plans to make any job reductions. The future of the business [British Steel] is based on that strong turnaround plan. U.K. Government Faces Pressure to Support Steel Industry SSI Redcar steelworks to be shut Slide 17

18 Jan-2012 Mar-2012 May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013 May-2013 Jul-2013 Sep-2013 Nov-2013 Jan-2014 Mar-2014 May-2014 Jul-2014 Sep-2014 Nov-2014 Jan-2015 Mar-2015 May-2015 Jul-2015 Sep-2015 Nov-2015 USD/tonne 000's tonnes/month Chinese imports is a key issue for EU industry EU steel imports & European HRC price Vs Chinese HRC price EU Steel Imports HRC Ex-Works Europe (USD/tonne) China Hot Rolled Coil Export Price (USD/tonne) Source: World Steel Association Slide 18

19 USD/ton European HRC spread has fallen to all-time lows but expected to recovery slightly by 2017 HRC spread (100) (300) (500) Actual 2011 Actual 2012 Actual 2013 Actual 2014 Actual 2015 Actual 2016 Forecast 2017 Forecast HRC spread Iron ore (fines 64%, Brazilian contract) Steel (HRC) - Western EUR Scrap Steel Hard coking coal (Queensland, Australian contract) Source: Capital IQ, Consensus Economics, Analysis Slide 19

20 Global economic growth to underpin world steel demand Real GDP growth projection World steel demand Global 2.6% 2.6% 2.8% 2.9% United States 2.4% 2.3% 2.3% 2.3% Eurozone 1.5% 1.6% 1.7 % 1.5% UK 2.3% 2.2% 2.3% 2.3% China 6.8% 6.5% 6.0% 5.7 % 21% 12% ,500 mt 10% 9% 3% 18% 15% 2,351 mt 7% 9% 2% S o uc e : P wc E c o no m ic s 45% 49% EU NAFTA CIS China Asia and Oceania exc China RoW Source:, World Steel Association Souce:, World Steel Association Slide 20

21 LTM EV/EBITDA multiple Steel plant transactions and trading multiples 20.0x 18.0x Schmolz + Bickenbach AG, 9.0x 16.0x 14.0x 12.0x Corus Group plc (nka:corus Group Limited), 8.1x Böhler-Uddeholm AG (nka:voestalpine Edelstahl GmbH), 8.4x Metals USA Holdings Corp., 8.5x North Star BlueScope Steel, LLC, 8.0x 10.0x 8.0x von Moos Stahl AG (nka:swiss Steel AG), 4.1x 6.0x 4.0x 2.0x Arcelor SA, 5.4x 0.0x Interquartile (2nd to 3rd) range Median trading multiple Source: Capital IQ, Mergermarket, Analysis Slide 21

22 Observations on the steel sector UK steel sector currently has the attention of the highest levels of government Focus of companies on market sales mix and product mix (production of more premium specialty steel products rather than commoditised products) Growth trajectory of end-markets (e.g. Automotive, Packaging, Manufactured Goods etc.) Being able to supply full product portfolio to be a premium supplier for some end markets Investment programmes and R&D programs becoming important to retain competitiveness and margins - Improve conversion costs, technical capability China steel capacity and government actions European market status and protectionism tariffs Potential acquirers of steel assets Slide 22

23 What sources of capital are there and what appetite do they have for mining investment currently? Slide 23

24 Stressed balance sheets are not necessarily a barrier to acquisition Corporates Private Equity - general and specialist Fund raising by manager office FY12 to YTD16 41% 6% 8% 3% 1% 1% 4% Australia Canada Cayman Islands Chile South Africa Private equity fund raising ($bn) Family offices 36% South Korea UK and Guernsey US Natural Resource investment ($m) Mining specialist ($m) Slide 24

25 Is investor sentiment from financial investors picking up from the lows of FY14 and FY15? Sovereign Wealth Funds - Middle East - Canadian Pension funds - Asian SWF State owned enterprises - China - Chile (Codelco) Japanese Trading House Others Slide 25

26 What is the trigger for activity now? Slide 26

27 Is now the perfect time for deal making? 1) Sellers being forced to the market Management teams being forced into action o o o declining reserves and resources bases following limited exploration expenditure lack of exploration restructuring Many miners still looking to deleverage with quality assets in the market Lack of exploration / development expenditure in mid-tier space will tighten supply 3) But. Commodity price growth Sovereign risk Enough quality assets coming to market 2) Buyers coming to the market Commodity prices appear to have stabilised a low point reached? Low valuations multiples compared to other sectors Deleveraged balance sheets from majors being delivered Cost savings programmes moved mines down the cost curve o US$ strengthening o Oil price declined Slide 27

28 Buy now. Pay later. Bridging commodity price valuation gaps Slide 28

29 Commodity price volatility demands flexibility Buyer & seller compromise sharing risk between parties Unlocking value to deals in natural resources Exploration results Volume of production Commodity price index Royalty streams Free cash flows Slide 29

30 Practical considerations for deferred consideration Tax consequences 2 Buyer s ability to finance Credit rating agency interpretations Balance sheet implications of deferred consideration 5 Structuring of deal for mature assets with rehabilitation obligations Slide 30

31 Thank you Any questions? Jonathan Lee + 44 (0) (0) Jacqueline Chow jacqueline.chow@uk.pwc.com + 44 (0) (0) Slide 31