Mining Deals - PwC · Mining Deals –Where is the money coming from and lessons learned from private equity Source: Refinitiv for Actuals, IHS Markit for Forecasts (50%) 0% 50% 100%

London School of Mines

6 June 2019

Mining Deals –Where is the money coming from and lessons learned from private equity

PwC

Commodity pricing

Mining Deals – Where is the money coming from and lessons learned from private equity

2

PwC

Bulk commodities

3

Favourable coal price environment underpinned metallurgical and thermal coal transactions in FY17 and FY18


Source: Refinitiv for Actuals, IHS Markit for Forecasts

(50%)

0%

50%

100%

150%

200%

% m

ov

em

en

t

Bulk Commodities Price Movement

Iron Ore Thermal Coal Metallurgical coal London Brent Crude

Met coal Iron ore Thermal coal

PwC

Base metals

4

Copper continues to have the least volatility reflecting the large market compared to other base metals



(50%)

0%

50%

100%

150%

200%

250%

300%

% m

ov

em

en

t

Base Metals Price Movement

Uranium Copper Nickel Cobalt Zinc London Brent Crude

Zinc

Brent

Copper Nickel

PwC

Precious metals

5

Lack of volatility in gold price creating a stable platform for deals



0%

50%

100%

150%

% m

ov

em

en

t

Precious Metals Price Movement

Gold Silver London Brent Crude

PwC

Public market valuations


6

PwC

Although over recent years mining equities have lagged behind the overall market, the gap is narrowing.

7


0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

31/12/2009 31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018

FTSE Benchmarking FY09 – FY19

FTSEAll Share Index FTSE 350 Mining Index

Source: Refinitiv

PwC

Increasing attractiveness of mining for institutional investors demonstrated by high yields….but returning cash to shareholders reduces reinvestment in exploration/development

8

Source: Refinitiv

-

2

4

6

8

10

12

14

16

18

31/12/2009 31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018

Dividend Yield Benchmarking FY09 - FY19

FTSE All Share DY FTSE 350 Mining DY

PwC

And the gap between commodity benchmarks and mining index has been closing as balance sheets have been repaired....

9


0.2

0.4

0.6

0.8

1.0

1.2

1.4

31/12/2009 31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018

LMEX Benchmarking FY09 – FY19

LMEX Index FTSE 350 Mining Index

Source: Refinitiv

PwC

Global gold mining stocks are still significantly disconnected from gold price

10


0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

31/12/2009 31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018

Gold Price Benchmarking FY09 – FY19

Gold Price S&P Global Gold Index

Source: Refinitiv

PwC

What has this meant for deal activity levels and capital allocation?


11

PwC

Very limited deals in YTD’19. Continuing hunt for copper but are seller price expectations preventing deals?

12


Source: Deallogic

1,394

1,159

621

145

47

41

61

14

-

10

20

30

40

50

60

70

-

200

400

600

800

1,000

1,200

1,400

1,600

FY16 FY17 FY18 YTD19

$ b

illi

on

No

of

Deals

No of deals by Commodity

Coal Copper Gold

Iron Other Silver

Uranium Zinc Deal Value $bn

-

2

4

6

8

10

12

14

16

18

20

Gold Copper Other Coal Iron Ore Zinc Silver Uranium

$ b

illi

on

Deal Value by Commodity


PwC

M&A focused on more stable mining regimes as deal volumes decrease. Are investors starting to see value in Africa again?

13


1,394

1,159

621

145

-

200

400

600

800

1,000

1,200

1,400

1,600


No

of

Deals

No of deals by Geography (Target)

North America Australia Asia Latin America Africa EMEA

Source: Deallogic

-

5

10

15

20

25

Africa Australia EMEA Asia Latin America NorthAmerica

$ b

illio

n

Deal Value by Geography (Target)


PwC

Despite the gold mega-mergers transactions have largely been made in cash in recent years. General increase in premiums paid over the last 3 years across commodities

14


47

41

61

14

-

10

20

30

40

50

60

70


$ B

illio

n

Methods for Payment

Cash Common Shares Mix of Cash and Shares Other Considerations

Source: Deallogic

(40)

(30)

(20)

(10)

-

10

20

30

40

50

60

Coal Copper Gold Iron Silver Uranium Zinc Other

% o

f p

rem

ium

pa

id

Average day 1 premium for Deals by Commodity


PwC

As Chinese economy evolves towards a “value-add” & “service” economy, its % funding of global mining capital has reduced…

15

Source: DCM AnalyticsNote: The financing data above excludes financing raised through streaming transactions


109

158

134

52

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

20

40

60

80

100

120

140

160

180


% o

f to

tal fi

nan

cin

g

$ b

illio

n

Top Regions Raising Capital

China Canada United States Russia

Switzerland Australia United Kingdom Other

169

291 295

261

232

209 203

109

158

134

52

-

50

100

150

200

250

300

350

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 YTD 19

$ b

illi

on

Global Mining - Capital Raised

Loans Bonds Convertibles IPO Follow-ons

PwC

… but on an absolute basis China is still the major source of capital for global mining

16

Source: DCM Analytics


-

5

10

15

20

25

30

35

40

45

50

China Canada United States Russia Switzerland Australia United Kingdom Other

$ b

illio

n

Capital raise by Region


PwC

Majority of capex focused on copper and gold projects – with substantial catch up in maintenance capex

17


53,570

61,157

108,047

30,111

-

20,000

40,000

60,000

80,000

100,000

120,000

2016 2017 2018 2019

$ m

illio

n

Brownfield vs Greenfield

Greenfield

Brownfield

23

35

57

15

-

10

20

30

40

50

60

70


$ B

illio

n

Development vs Maintenance

Maintenance

Development

54 61

108

30

-

50

100

150


$ b

illio

n

Capex by Commodity

Copper Gold Lithium Coal Iron Ore Nickel Zinc Other


PwC

Significant copper project announcements in 2018 with expenditure focused on brownfield life extensions & maintenance capex

18


12

8

18

11

-

5

10

15

20


$ b

illio

n

Total Copper Greenfield spend

Development

7 8

27

3

-

5

10

15

20

25

30


$ b

illio

n

Total Copper Brownfield spend

Maintenance

Development


19

16

44

13

-

5

10

15

20

25

30

35

40

45

50


$ b

illio

n

Copper capex by Geography

Other

DRC

Chile

Argentina

Peru

Panama

Mongolia

United States

PwC

• Investor sentiment gradually returning –

but this is being driven by returns to

shareholders and could be tempered by

environmental tragedies

• Gold, which has been range bound over

the recent past, continues to lead the way

in announced deals

• Premiums have risen over the last 3 years

– reflecting confidence in supply/demand

fundamentals but the impact of the

technology cold war is already coming

through

• China continues to be most active deployer

of capital, but relative share decreasing

• Search for copper is being led by

investment by existing owners in capex,

rather than M&A. But almost everyone is

looking…

In summary…


19

PwC

Where will the investment come from?


20

PwC

1) Debt.Improved operational performance, overall commodity price environment, consolidation and reduced exploration spend has improved the cash and gearing position of the Top40

21


63 53

175

161

13

16

-

50

100

150

200

250

300

FY 17 FY 18

$ m

illio

n

Historical Debt

Other Debt

Fixed Rate Debt

Floating Rate Debt

Source: Deallogic

$ Billion FY 17 FY 18 %

Floating rates 55 45 (17%)

Fixed rates 152 143 (6%)

Accrued interest and other 4 9 115%

Non-Current Debt 156 152

Floating rates - current 8 8 (9%)

Fixed rates - current 23 18 (24%)

Accrued interest and other - current 9 8 (18%)

Current Debt 41 33 (20%)

Floating Rate Debt 63 53 (16%)

Fixed Rate Debt 175 161 (8%)

Other Debt 13 16 22%

Total Debt 252 230 (8%)

Cash (87) (93) 7%

Net Debt 165 137 (17%)

Financial Gearing 31% 28% 4%

PwC

2). ChinaAs the Chinese economy shifts in focus can the industry continue to rely on Chinese investment?

22


95.0

54.0

71.0

86.0

63.0

26.0

-

10

20

30

40

50

60

70

80

90

100

-

2

4

6

8

10

12

14

2014 2015 2016 2017 2018 YTD 2019

£ b

n

Where is China deploying capital?

Other

Congo

Canada

Australia

China

Deal count

PwC

3). Sovereign wealth funds Returning to mining investment – but small scale transactions

23


Qatar Investment Authority and

Norway’s Sovereign Wealth Fund

revealed as investors in the UK’s

Sirius Minerals

May 2019

Russian Direct Investment Fund and

Partners announces investment in

Intergeo, a part of ONEXIM Group

March 2019

Mubadala announces a €130m

investment in Canada’s Equinox

Gold

February 2019

Source: Public information

PwC

4) Generalist PEDedicated funds have traditionally lead private equity investment into mining but will the next wave of investment be spearheaded by larger general funds?

24


PwC

Lessons from the Private Equity in the North Sea


25

PwC

Increased market attractiveness coupled with sell side pressures lead to an influx of private equity capital into the North Sea

26

Mariner Field stake to be sold to

Blackstone and Blue Water Energy

backed Siccar Point Energy.Mergermarket, Aug 2016

ConocoPhilips agrees to sell UK E&P

business to Harbour Energy/EIG

backed Chrysaor for USD 2.67bn

Mergermarket, April 2019

Engie's EPI business to be acquired

by Carlyle and CVC-backed Neptune

in USD 3.9bn dealMergermarket, May 2017

Shell to sell North Sea assets for up

to USD 3.8bn to group led by

Harbour Energy/EIG backed

ChrysaorMergermarket, Jan 2017

PwC

Generalist PE not has success in mining M&A – but recent transactions in oil & gas and improvements in overall supply/demand fundamentals could reignite interest

27

An eye of the exit (IPO, downstream, consolidator)

Sharper focus on balance sheet and working capital

Quick dividend returns early in investment life cycle

M&A optionality around portfolio of assets

De-risking the return from commodity price

movements

Preference for locked box (with very long completion

time frames)

Increased data requirements

More management access

More education around market and asset

Focus on balance sheet being delivered and

negotiation around this (impact equity price)

What does PE look for in natural resources

transactions?

What does this mean for a corporate vendor or

competing against a PE buyer?

Any questions?

Jonathan Lee is an experienced director who focuses on natural

resources transactions across the world. He leads our Mining Financial

Due Diligence practise in the UK.

He has worked with a variety of investors including the Majors,

Consolidators, Sovereign Wealth Funds, Japanese trading houses and

Private equity.

He needs a more age appropriate photo.Jonathan Lee

[email protected]

+44 (0) 771 886 4 887

pwc.com

Thank you

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Documents

Mining Deals - PwC · Mining Deals –Where is the money coming from and lessons learned from private equity Source: Refinitiv for Actuals, IHS Markit for Forecasts (50%) 0% 50% 100%