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Mining and metals companies focus on buy, build, return

With a healthy outlook for the sector, mining and metals companies have increased access to debt and financing from equity markets. Instead of returning this newfound cash to shareholders through dividends and buybacks, the sector is increasingly focused on investments — prioritising growth with a balanced capital agenda as it strives to meet both the short-term needs of investors and long-term stability of returns.
Mining and metals companies focus on buy, build, return Mining and metals companies focus on buy, build, return Mining and metals companies focus on buy, build, return Mining and metals companies focus on buy, build, return Mining and metals companies focus on buy, build, return

Steel prices in the US are nearing decade highs. Image: iStock.com/zhaojiankang

Bob Stall*

Steel companies are reaping the benefits of the now-level trade situation. As steel prices in the US near decade highs, the industry has seen deal value and volume rise by 25% and 15%, respectively. More activity is expected moving forward.

While the market has been subdued over the past year, mining and metals executives expect deal activity to improve in the next 12 months, according to the latest EY Global Capital Confidence Barometer.

In fact, 74% of global mining and metals executives said they expect the M&A market to improve over the next year, compared with just 34% a year ago. Sixty percent of respondents said they expected to see an increase in the number of completed deals, up from 34% the prior year.

Disciplined investment

Although the economy in general is poised to generate increased M&A activity, mining and metals executives are also more bullish than those in other industries. Fifty-eight percent of global mining executives said they intend to pursue M&A in the next 12 months, compared with 46% across all sectors. 

That said, companies are hyper-focused on disciplined decision-making in their capital allocation strategies.

When evaluating acquisitions, executives are focused on top-quartile assets from an operating cost standpoint, and looking to minimise the acquisition of legacy liabilities.

In addition, executives are increasingly looking to de-risk their investments by exploring joint ventures and other nontraditional funding methods.

Additionally, mining and metals executives aren't only considering their peers as potential targets — they're looking across industries too.

Driven by technology and digital innovations that foster compatibility and allow for nontraditional pairings, 27% of respondents said they expect to see an increase in cross-sector deals.

As well, specifically in the steel industry, we are seeing an increase in strategic acquisitions of downstream processing operations, as well as increased spend on building new, technologically advanced operations to meet customer demand.

Prioritising efficiency

On top of a renewed focus on investments, mining and metals companies are increasingly conscious of their operating costs. These firms are glad to be reaping the benefits of the rebound in metals pricing, but having lived through the cycles of the market, they don't want their profitability to be solely dependent on prices.

With an industry-wide push to improve efficiency, many mining and metals companies are focusing on their digital strategy as a way to simplify and streamline their operations to improve efficiency.

Since cutting jobs in mid-2014, when metals prices began to drop, firms have used artificial intelligence and other digital technologies to operate with less of a workforce. Improved supply chain operations and enhanced equipment and transportation, such as autonomous trucks and predictive maintenance, have made companies more productive.

With the recent success and strong outlook in the industry, we are also seeing companies increase their focus on returning capital to shareholders. This is seen not only as a reward to key stakeholders who have stuck with companies through the downturn, but as a message to the markets that they are poised for growth and sustained success.

On the back of a healthy economy and strong year-over-year production, mining and metals companies are eager to once again prioritise investment. While this is expected to result in increased organic and inorganic activity, industry executives are cognisant of their past and aim to grow and produce at a sustainable rate.

Therefore, any build or buy decisions will likely be exercised in a disciplined fashion, with the goal of underpinning efficiency and long-term success, no matter commodity prices.

*Bob Stall is US mining and metals leader at Ernst & Young LLP. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.