Mergers, acquisitions and capital-raising in mining and metals trends, 2014 outlook: changing gear. The CFO perspective at a glance

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1 Mergers, acquisitions and capital-raising in mining and metals 2013 trends, 2014 outlook: changing gear The CFO perspective at a glance

2 The CFO perspective at a glance We want to help you get to the insight you need as quickly as possible. EY s CFO perspectives summarize the key findings from EY reports from the perspective of the CFO and future finance leader. What is Mergers, acquisitions and capital-raising in mining and metals about? This EY study examines transactions and financing in the mining and metals sector in 2013, and discusses the outlook for 2014.

3 Key trends and outlook Investment inertia Continuing price volatility, arising from mineral supply seeking to find equilibrium with demand and changes to the global economic environment meant that investment activity remained subdued during Fewer M&A transactions were pursued, with deal volume falling by 25% year on year. Traditional buyers concentrated on capital discipline, improving balance sheet strength and maximizing return on capital. When deals were completed, they tended to be smaller, low-risk acquisitions fueled by a desire to increase an existing stake, achieve domestic or interregional consolidation, or a strategic attempt to secure future supply. Even divestment plans were scaled back as it became clear that price expectations could not be met, and balance sheets became less stressed due to refinancing and stronger cash generation in the second half of the year. A challenging environment for capital-raising Capital-raising followed a similar trend, with only a 9% increase in total proceeds to US$272b, largely due to some exceptional loan refinancings, and a 9% decrease in the total volume of issues to the lowest level seen since There were few new investments in the sector and the bulk of capital raised during 2013 was used to refinance existing facilities. Bond proceeds decreased by 22%, partly due to economic uncertainty and partly due to reduced demand for companies, with the majors having largely restructured balance sheets sufficiently. Conditions in public equity markets remained highly challenging throughout IPOs were at their lowest level in at least a decade, and equity issuance was an untenable fund-raising option for most. The biggest growth story of the year was that of convertible bonds, which saw a 32% increase in volume and a 119% increase in proceeds raised, albeit from a low base.

4 A window of opportunity For those with confidence in the sector and access to longer-term, more patient capital, there is a significant window of opportunity to take advantage of the current market conditions. As a result, we expect growth in M&A activity during the first half of 2014 to be largely driven by financial investors and equity-backed alternative capital providers. These investors are looking to capitalize on reduced competition for assets, lower valuations and a continued flow of divestments from the large cap producers. This window of opportunity will remain open until equity markets for the sector recover fully and for as long as large cap producers remain cautious about investing. In the years ahead, specialist financial investors are likely to become mainstream investors, filling the gap until traditional acquirers and equity market confidence return. A tipping point 2013 marks the tipping point for the sector, with many investors calling it the bottom of the market. The mining and metals sector is entering 2014 with a more positive outlook: confidence in the global economy is improving, companies have taken action to deleverage balance sheets, and the industry-wide focus on productivity and efficiency should begin to yield results. As a result, we expect the gradual strengthening of mining and metals equity valuations to continue and the availability of capital to increase. However, caution will prevail for the foreseeable future. Continuing economic volatility means that any uplift in M&A activity and improvement of capital-raising conditions will be gradual and will require innovation in pricing to tame volatility.

5 The capital agenda Based around four dimensions, the capital agenda helps mining and metals companies consider their issues and challenges and understand their options to make more informed capital decisions. 1. Preserving capital: reshaping the operational and capital base 2. Optimizing capital: driving cash and working capital, and managing the portfolio of assets 3. Raising capital: assessing future capital requirements and assessing funding sources 4. Investing capital: strengthening investment appraisal and transaction execution How organizations manage their capital agenda today will define their competitive position tomorrow.

6 Implications for CFOs Innovative thinking on phasing capital expenditure will be required. CFOs need to think creatively about how they secure finance for projects, particularly those that have longer-term cash flows. One valuable tactic will be to look for ways to reduce or phase capital expenditure in an attempt to minimize risk and maximize returns potential. Companies across the industry are likely to employ strategies that reduce up-front capital outlays and introduce optionality through staged project development, such as incremental capacity build. A focus on capital preservation must remain. In 2013, most of the industry focused on reshaping its operational and capital base and much has already been achieved. However, tighter margins and the prospect of tightening credit options in 2014 will require a continued focus on the need and opportunities for capital restructuring and operational improvements. CFOs will continue to lead this charge within the sector. Capital markets will be volatile but present opportunities. Anticipation of key economic triggers in 2014, particularly around government stimulus and interest rate rises, is likely to create an unpredictable and challenging capital-raising environment. Peaks of improved investor confidence and, in turn, risk-seeking will be balanced by episodes of investor insecurity and risk aversion. This collectively represents the

7 risk of reduced demand and therefore less favorable terms for borrowers in However, this also presents the CFO with opportunities to take advantage of pockets of demand. We expect to see companies opportunistically access the bond and loans markets early in the year to refinance ahead of any anticipated tightening. CFOs must retain a strong focus on streamlining the portfolio. Many companies have strengthened their balance sheets and no longer need to conduct divestments to release cash. Yet CFOs and management teams should not dismiss the potential for further divestments. They should conduct frequent reviews of the portfolio to determine whether further divestments should take place to restore balance sheets and free up management time to focus on strategic priorities. Joint venturing will return to its classic role of risk sharing. With the next round of the new supply projects being more technically complex (for example, due to greater depths, lower grades, difficult metallurgy or significant infrastructure investment requirements), CFOs should consider joint venturing as a means of sharing risks and securing the funding needed to progress large projects through development stages. It is unlikely that even the largest mining and metals companies will go it alone in 2014.

8 Financial investors will become both competitors for assets and sources of capital. As long as management remains primarily focused on improving ROCE, it is unlikely that the majors will pursue large-scale acquisitions. Activity will instead be driven by financial investors looking to realize potential upside not only from a longer-term recovery in commodity prices, but also by utilizing their own in-house technical experience. Companies must pay careful attention to these entities, as they will increasingly become mainstream investors and competitors for the same assets. At the same time, they will increasingly be valuable sources of capital for future projects either to replace extinguishing supply or meet future demand growth. Further reading Captital Confidence Barometer: mining and metals sector, EY, 2013 Business risks in mining and metals: , EY, 2013 CFO Capital Confidence Barometer, EY, 2013 For a copy of the full report, please visit ey.com/miningmetals.

9 Other insights for the CFO Mergers, acquisitions and capital-raising in mining and metals is one of a number of studies providing insight relating to the CFO role represented by the wheel below. For more on these insights, please go to ey.com/cfo or contact your local EY representative. Development of business strategy DEVELOPMENT marketplace Communicating to the external Developing and defining the overall strategy for your organization Representing the organization s progress on strategic goals to external stakeholders Funding organizational strategy 5 6 Funding, enabling and executing strategy set by the CEO The CFO s role 4 Trusting the numbers Ensuring business decisions are grounded in sound financial criteria 1 3 ENABLEMENT 2 Leading key initiatives in finance that support overall strategic goals Providing insight and analysis to support the CEO and other senior managers Getting your house in order EXECUTION Providing insight Mergers, acquisitions and capital raising in mining and metals 2013 trends 2014 outlook Changing gear

10 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. EY s Global Mining & Metals Center With a volatile outlook for mining and metals, the global sector is focused on cost optimization and productivity improvement, while poised for value-based growth opportunities as they arise. The sector also faces the increased challenges of changing expectations in the maintenance of its social license to operate, skills shortages, effectively executing capital projects and meeting government revenue expectations. EY s Global Mining & Metals Center brings together a worldwide team of professionals to help you succeed a team with deep technical experience in providing assurance, tax, transactions and advisory services to the mining and metals sector. The center is where people and ideas come together to help mining and metals companies meet the issues of today and anticipate those of tomorrow. Ultimately, it enables us to help you meet your goals and compete more effectively EYGM Limited. All Rights Reserved. EYG no. AU2232 EMEIA Marketing Agency ED None In line with EY s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/mining