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Why nervous bankers could spark mining deals in 2016

Growing financial stress in the mining sector will trigger an increase this year in divestments, spin-offs, joint ventures – and possibly hostile takeover bids. 

That is the view of a report released by accounting and advisory firm EY on Thursday . 

What will drive the expected spike in corporate activity, after a dismal 2015 in M&A, is increasing pressure from financiers over miners' net debt to earnings levels, which are the worst in 15 years. 

Mining majors, such as Anglo American, Vale, Glencore, are feeling the heat and have all put a suite of assets on the block. 

Last year, global mining deal volumes were also at the lowest level in 15 years. Excluding BHP Billiton's $US8.7 billion spin-off of South32, deal value dropped globally to $US40 billion, compared with $US44.6 billion in 2014.

In Australia, deal volume more than halved to 68 transactions and deal value dropped 10 per cent to $4.3 billion, excluding South32. 


Paul Murphy, head of EY Oceania mining and metals transactions advisory, says coal is expected to dominate deal activity in Australia this year, with new types of "entrepreneurial buyers from outside the sector" set to step in, as well as private equity. 

Issues affecting availability of finance for coal – such as social licence to operate, environmental concerns and activism – had paved the way for a new type of buyer. 

Buyers needed to be able to afford to take a long-term view and pick up bargains while coal is out of favour, and Australian coal is being targeted because it is high quality.

Salim's Mount Pleasant deal 

Last week, Indonesia's powerful Salim group bought Rio Tinto's Mount Pleasant coal project in the Hunter Valley for $US224 million ($320 million). Rio is trying to exit thermal coal. 

Across the broader mining sector, uncertainty over when the dismal market will recover and market volatility will see divestments increase. 

Another key driver for asset sales and restructuring is the declining appetite of banks to lend to miners, Mr Murphy said. 

Some of the best deals in mining this year will be buying and restructuring companies out of insolvencies

Charles Fear, chief executive, Argonaut,

After two years of "relatively strong" lending to the sector, loans fell 27 per cent globally last year to $US122 billion, compared with 2014. 

Net debt to EBITDA is at levels exceeding those last seen in 2000. 

Spin-offs as a means to package and divest assets have increasingly featured in boardroom discussions and will "remain high on the strategic agenda" of companies, Mr Murphy said. 

The pressure to preserve capital and remove risk will spur mergers and joint ventures. And opportunistic takeover bids could be lobbed, but only where the target company operates low-cost assets in stable jurisdictions.

Distressed assets

Last month, Charles Fear, chief executive of Perth-based corporate advisory firm Argonaut, told The Australian Financial Review that the market for most commodities was bouncing along the bottom, and mergers and acquisitions typically led a recovery, as assets were picked out of distressed companies at reasonable prices.

"Some of the best deals in mining this year will be buying and restructuring companies out of insolvencies," Mr Fear said.

"This is indicative of the bottom of the cycle. We've been here before. We have now seen every single commodity capitulate - they are all trading at decade-plus lows. That usually triggers rationalisation and closures within each commodity, which will ultimately give rise to a pick-up."

Mr Murphy is tipping more shutdowns in coal in Australia this year as coal miners' take-or-pay commitments - which mean they pay for port or rail capacity regardless of whether they use it - expire. 

He said some "excellent, top-tier" coal assets were likely to change hands. 

"Cost-cutting, productivity measures and the benefit of the falling Australian dollar helped delay decisions in 2015 but the weight of corporate debt in an environment of commodity-price uncertainty will bring people to the table this year."