Rajat Kohli
Photo by: Duane Daws
JOHANNESBURG (miningweekly.com) – Because investors have been shunning the mining sector, mining company CEOs lacked the confidence to undertake any significant merger and acquisition (M&A) in the last two years.
M&A generally thrives on confidence, which has been in short supply because of commodity prices falling even further in 2014, making it difficult to take an assured view on putting together business plans for targeted acquisitions.
“M&A’s a confidence business in part and that was lacking last year,” Standard Bank international mining and metals head Rajat Kohli said on Monday at a media conference attended by Mining Weekly Online.
However, looking forward to 2015, he is expecting something different because of the current acute funding challenges for midtier and junior mining companies in particular.
Kohli expects more mining M&A this year, not because mining CEOs will be exuding more conference, but because they will be running out of cash.
“They’ll see their cash flows are coming off because commodity prices are lower and they are finding it quite tough to refinance or to raise new funding.
“They will have to look at other ways to create value and grow their business and one of the ways to do that is through merger activity,” he told the conference that was also addressed by the bank’s commodities research head Walter de Wet, mining corporate finance head Sandra du Toit and mining corporate banking executive Peter von Klemperer.
De Wet reported that platinum and palladium remained deficit markets, which would continue to be relatively tough in 2015 because of the continual rise of real interest rates.
He believed that platinum should trade closer to $1 400/oz in 2016 as opposed to the current level of some $1 250/oz and palladium would average $830/oz in 2015, rising to $900/oz in 2016, which is above the Bloomberg consensus.
“We think platinum’s going to average lower this year than it did last year,” De Wet said, who believed platinum inventories of 15-million ounces were higher than expected.
However, platinum available to market was at a lower seven-million ounces to eight-million ounces, with palladium inventory at 16-million to 17-million ounces.
But the platinum and palladium inventories were not regarded as massive against expected consumption.
The bank forecast a gold price of $1 223/oz this year, rising to $1 305/oz in 2016. In euro and rand terms, the gold price would be more favourable.
The bank saw 2015 as being the trough year for commodity prices, including oil prices, and there was currently a benefit for the miners of metals and minerals that required less energy to produce.
The likes of iron-ore and aluminium should benefit from the lower oil price environment.
The flipside was shallower cost curves, which would take inflation out of the system and put a cap on commodity price forecasts.
The bank did not provide a view on diamonds because of the absence of even a shadow terminal market, which made a view difficult.
However, last week’s Petra Diamonds announcement had put a price caution out into the sector, which had led to opinions that the 2014 run-up of diamond prices might have plateaued, Kohli said in response to Mining Weekly Online.