PERTH (miningweekly.com) – Australian merger and acquisition (M&A) activity in the resource sector dropped by 26% in the first quarter of 2015, with only 17 deals concluded during the period.

Advisory firm EY revealed on Tuesday that the value of the M&A transactions also declined by 52% over the same period, to A$125-million.

EY Australia mining and metals transaction leader Paul Murphy said weak and volatile pricing in the past year or two had been a supply-side issue for most commodities, and added that the timing of recovery would be different for each commodity.

“Base metals are closer to an uptick in terms of supply/demand balance, while structural supply issues remain for many of the bulk commodities,” he said.

Murphy noted that prospective deal-makers in the mining and metals sector should pay closer attention to where individual commodities were in the cycle. Murphy also noted that cost-cutting and productivity improvements across the industry meant cost curves were rebasing to a new normal.

“Add to this the lower Australian dollar, energy cost reductions and freight rate reductions and it means the industry in Australia will be able to sustain production at much lower commodity prices than they have during the boom phase and the immediate aftermath,” he said.

Murphy added there was greater confidence among prospective buyers that cost reductions and productivity improvements in the sector were real and sustainable.

“The major variable then becomes commodity prices and there are still differences on the outlook for commodity prices and the value sharing between potential buyers and sellers for the introduction of fresh capital – so understanding the supply and demand dynamics of the specific commodity becomes more important in assessing the economics of potential acquisitions.”

“There is no doubt at the moment that iron-ore commodity pricing is heavily influenced by the supply side resulting from the boom-driven investment decisions. The same cannot be said for some of the base metals commodities, such as zinc and nickel, which are sitting at the other end of the cycle and face declining supply and less volatile demand.”

“We are already starting to see that in completed deals, with gold accounting for more than a quarter of all global deals by value during the first quarter – and we have continued to see it in announced deal activity.”

Murphy said that as confidence in adjusted cost bases grew, and the cycle stage by commodity became more apparent, investors, including financial investors, were likely to begin taking stronger positions in the sector.

“We are also seeing some opportunities on the demand side of the equation, with a positive growth outlook in India for metals-intensive industries and a lot of interest in strategic metals and rare earths with developments in energy storage technologies,” he said.

Globally, the total value of M&A activity in the first quarter of 2015 dropped by 18%, to $5.9-billion, while the volume of M&A activity nearly halved during the same period, with only 79 deals completed.

EY’s analysis showed financial investors accounted for 28% of global deal volume and 46% of Australian deal volume in the first quarter, albeit from very low bases.

“Interestingly, buyer competition was identified as a key challenge to deal strategies by more than a third of the mining and metals sector respondents in EY’s latest biannual Global Capital Confidence Barometer, and once again we expect to see that play out in some commodities earlier than others.”

The Global Capital Confidence Barometer is a biannual survey of more than 1 600 executives in 54 countries, including 63 respondents from the mining and metals sector.

Some 49% of the mining and metals respondents expected to actively pursue an acquisition in the next 12 months, while the same number expect the M&A market to improve – albeit from the decade-low levels of 2014.