M&A Activity Could Pick up in the Mining Sector

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Mergers and acquisitions activity in the global metals and mining sector hit a seven-year low in 2013, according to Ernst & Young. The accounting firm, however, expects deal making activity to pick up this year. That certainly seems likely, given some of the developments this week.

M&A activity could pick up
In a report on the metals and mining sector released earlier this year, Ernst & Young had noted that the sector saw 703 deals in 2013. The value of these deals was $124.7 billion. According to Ernst & Young, the metals and mining sector saw the lowest number of deals in 2013 since 2006. In terms of dollar value of deals, the figure was greatly helped by the Glencore-Xstrata merger. Excluding that merger, total deal value for 2013 was $87.3 billion, the lowest global deal value since 2009.

Ernst & Young's global mining and metals transactions leader Lee Downham told The Wall Street Journal that factors such as price volatility, senior management changes, and large impairments were among the reasons for relatively lower deal making activity. However, the consulting firm expects deal making activity to pick up in 2014. Some recent developments seem to support Ernst & Young's outlook for deal making activity.

BHP Billiton hints at offloading non-core assets
Since the end of the commodity supercycle, the strategy of mining giants such as BHP Billiton (NYSE: BHP  ) and Rio Tinto (NYSE: RIO  ) has been to focus on core assets. On Tuesday, BHP Billiton said that it is now evaluating the next phase of its strategy.

Responding to market speculation over its portfolio, BHP Billiton said in a statement that simplification of its portfolio is a priority and is something the company has pursued for several years. BHP believes that a portfolio focused on its major iron ore, copper, coal, and petroleum assets would provide diversification, help in growing free cash flows, and give a superior return on investment. The company plans to focus on these four areas and possibly potash. This means the company will offload its nickel, manganese, and aluminum businesses. There is speculation that BHP could spin off its non-core assets into a separate company. And BHP is not the only mining company that is looking to offload assets. Rio Tinto has been looking to sell its non-core assets.

Of course, mining giants have been looking to offload these assets for a while. However, in 2013, the environment wasn't the best for deal making as Ernst & Young noted in its report.

X2 Resources raises money
Earlier this week, X2 Resources, formed by prior Xstrata CEO Mick Davis, secured $2.5 billion in committed funding and another $1.25 billion in conditional funding. X2 Resources was formed to invest in the metals and mining sector. The venture seeks to leverage Davis's experience in running Xstrata. In fact, Davis is not the only former mining company boss to have created such a venture.

Former Barrick Gold (NYSE: ABX  ) CEO Aaron Regent formed Magris Resources, which is looking to acquire mining assets. The company was developed with backing from institutional and private equity investors. Brazilian miner Vale's (NYSE: VALE  ) former CEO Roger Agnelli has also started a mining investment venture.

The formation of mining ventures such as Magris Resources and X2 Resources, along with interest from private equity firms, is being seen as one of the reasons for a pick-up in deal making in the mining sector this year. In fact, this was something Ernst & Young also noted in its report. With X2 Resources obtaining funding, we could see some deals in the next few months.

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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