Managing Director: Investment Banking Division, Absa Corporate and Investment Banking
The mining and resources sectors have always attracted larger-than-life personalities and it is unfortunate that the 2021 Mining Indaba won’t be held face-to-face, especially when there is an underlying sense of anticipation around potential M&A transactions.
There is a real energy in the resources sector at the moment and we could be at the start of a commodity super-cycle. There are a few key drivers:
- Favourable commodity prices across most commodities have ignited the underlying operational cash flows and this has been reflected in upward share price movements. If the global vaccine program rollout picks up momentum, this will also build real confidence in the global recovery which will underpin the commodity cycle and be the catalyst for M&A.
- While there is a degree of skepticism about the COVID-19 data coming out of China, what is clear is that China is continuing to invest in its infrastructure program to generate its own economic recovery, and with supply constraints for key commodities - partly caused by COVID-19 - this demand is creating pricing pressure for base metals.
- No one can doubt that COVID-19 has fundamentally changed the way the global economy works. Supply chains were quickly exposed, production forecasts vaporized, and expected supply evaporated in days and at the same time demand cratered overnight and if there was demand, supply was either not available or inventory was at the incorrect point in the supply chain. This has resulted in the shortening of supply chains with a global shift back to localization throughout the supply chain, which is bolstering more balanced yet increased demand now spread across the globe.
With these underlying drivers, Absa is of the view that 2021 may well be a break out year for mining and commodity M&A with clear trends in acquisition activity:
While the resources sector is clearly enjoying a more positive outlook, certain mines and producers have not been able to weather the COVID-19 storm and with weak balance sheets and COVID-19 led productivity challenges, their long suffering shareholders may bail out on the sight of any reasonable cash offer.
We expect Private Equity players and cash-flush mining groups to be opportunistic buyers for the right assets.
Pent-up M&A Demand:
In 2020, it was challenging to execute deals as many deal teams were unable to meet their counter parts, discrete meetings between principles couldn’t take place and due diligence teams couldn’t get to site. This was very different from the buzz and haggling of past deal making. It is very difficult to “look under the hood” of a West African gold deposit while sitting in Canada or South Africa.
Whilst remote working is now firmly entrenched, with the anticipated post vaccine decline in COVID-19 cases leading to the removal of travel restrictions, many of these deal teams will be looking to get out and put deals together. There are still commodity assets with reasonable multiples and with rising commodity prices, deals that may have been speculated about may now appear in the public domain.
It is clear that once travel restrictions are removed, the due diligence and technical teams will be unleashed and we will really start seeing deals consummated.
Gold is shining again:
While there are question marks about the long term viability of the South African gold mining assets with declining yields and miners have to go even deeper, there is no dispute that there is global interest in the physical gold price. The recent decline in US dollar strength and ongoing geopolitical uncertainty, even after the US Presidential election, has all underpinned the importance of gold. This is a life boat for South African mines where all in costs require a bullish gold spot price.
Importantly, if China maintains its intention for the Renminbi to be the equivalent of the US dollar as a safe haven global currency, it needs to get access to gold assets as a core part of its reserve base. This will continue to drive demand for physical gold with a real impact on the longer term spot price.
If it’s not China (or Russia) building up their reserves and creating demand for physical gold, it is the global inflow into gold exchange traded funds which pushed the gold holdings of ETFs to a new record in 2020.
In 2018 / 2019, the gold sector saw some major mergers between the heavyweights including Newmont-Goldcorp and Barrick Randgold. While we may not see deals of this scale in 2021, with this positive gold backdrop, there are still plenty of deals to be done.
In South Africa, with the acquisition by Harmony Gold of the remaining South Africa asset of Anglo Gold, there are limited large South African gold M&A opportunities, so you may find the likes of Sibanye-Stillwater, Harmony Gold and Goldfields looking at North America, West Africa or the newer gold frontiers such as Papua New Guinea or South America for diversification and quality yielding gold assets.
Elsewhere on the continent, we expect activity in West Africa to continue and there seems perineal interest in the region albeit this interest does not always convert into M&A. Yields remain attractive though challenges remain on their position on the cost curve due to infrastructure limitations often compounded by regulatory uncertainty. However, in Absa’s view with its regional presence in Africa, there is sufficient confidence in the West African region to underpin and drive M&A.
Overall, we wouldn’t be surprised to see aggressive M&A this year from the likes of Kinross Gold, Sibanye-Stillwater and AngloGold Ashanti.
Fossil fuel exits:
It is quite clear that stakeholders – including financiers - are facing significant pressure to meet Environmental, Sustainability and Corporate Governance (ESG) standards.
Fossil fuel exits by the larger global miners be it as a result of bank, shareholder or activist pressure will continue. This theme is being played out across the globe and is evident in the exits from thermal coal by South32 and Anglo American particularly in South Africa.
Having said that, emerging markets still require an efficient and cheap energy source to assist in their industrialisation drives - the developed countries having gained significant benefit from coal in their industrialising - and despite pressure, Africa, India and China will still be reliant on coal for years to come.
While there are many players who will be exiting the fossil fuels space in favour of renewables and electric vehicle (“EV”) based commodities, we wouldn’t be surprised to see a bit of a “land grab” for cash flow positive assets in out-of-favour commodities.
M&A discipline is critical this time around in this new commodity cycle. There is significant capital available and this leads to a degree of exuberance with commodity producers which historically has not always ended well. In the last cycle, many producers and mining houses materially overpaid for acquisitions which fell well shorty on the intended value creation that was sold to shareholders. Acquisitive groups will have to focus on clear strategies that can create scale and value to shareholders. As we have mentioned, ESG will also drive where this capital is allocated along with the growing demand for EV based commodities.
With ongoing face-to-face interactions being limited, the ability of deal-making teams will be tested. Dealmakers will play a far larger role in M&A than we have previously seen as the ability to “broker” deals in this environment will be even more paramount. Those dealmakers with quality and direct networks will be the catalyst for M&A deals and being a trusted advisor will make a real difference over execution based advisory teams.
At Absa Corporate and Investment Banking, we play the role of both dealmaker and financier - we can back our deals with balance sheet. Critically, we bring into this environment of potential M&A, an experienced M&A advisory mining team that has demonstrable experience in linking up counter parties and getting deals done. We truly understand the potential of a deal for our clients and assist them in realising their ambitions.