PERTH (miningweekly.com) – A gradual return of merger and acquisition (M&A) activity in the mining sector has been predicted for 2014, after 2013 reported the lowest number of deals since 2006.

Advisory firm EY reported that, excluding the all-share merger between majors Xstrata and Glencore, deal volumes and deal value for the 2013 financial year were down 25% and 16% year-on-year, to 702 and $87.3-billion respectively.

Cross-border deal activity as a proportion of total deal volume fell for the first time since the financial crisis, dropping from 52% in 2012 to 42% in 2013, with only 18% of total deal value in 2013 targeting cross-border assets.

Capital raising in 2013 also followed a similar trend, with a 9% decrease in the total volume of issues to the lowest level seen since the 2008 global financial crisis, and a 9% increase in total proceeds to $272-billion, largely owing to some exceptional loan refinancings.

EY’s global mining and metals transactions leader, Lee Downham, said that the third quarter of 2013 was widely seen as the bottom of the market.

“The extreme price volatility and rapid changes to the global economy in 2012 and into 2013, combined with large impairments and senior management changes across the sector, meant the risks in doing deals in 2013 were just too great given the moving base on which decisions needed to be made.”

He noted that although there were successful divestments, there was also strong evidence that price volatility continued to create a price expectation gap between buyers and sellers.

Downham said this week that the foundations had been laid for a gradual return to M&A in 2014.

“Confidence in the global economy continues to improve, larger companies have stronger balance sheets, and the focus on productivity and efficiency should begin to yield margin improvements. This should provide a better environment for both deal making and capital raising,” said Downham.

Financial investors and equity-backed alternative capital providers will be particularly active in the M&A market in the first half of 2014, driven by anticipated longer-term commodity price recovery and the ability to leverage management ability, EY predicted.

“Private capital funds spent 2013 raising capital and we expect that to be deployed in 2014. We estimate these investors have more than $10-billion deal capacity across the sector and we expect to see some big deals being done over the next year.”

He predicted that the investors would be focused on low-risk geographies and looking to leverage under-performing assets, using technical, operational and financial influence to generate better returns.

EY was also expecting to see a strong appetite from debt providers, with increased competition among banks likely to improve access to leveraged loans for quality midtier mining companies and developers.

However, given the strict criteria applied by these investors, Downham said that it was questionable if the availability of these funds would support industry needs in its entirety.

This increased in appetite follows a year in which financial investors’ share of total deal value in the sector increased from 5% in 2012 to 19% in 2013.

“This supports the view that 2013 marks the tipping point for the sector, with many of the providers of such capital calling the bottom of the market,” said Downham.

Meanwhile, EY also expected to see a greater proportion of the sector’s funding come from equity through follow-on raisings during 2014, and a stronger appetite from debt providers improving access to leveraged loans for quality midtier miners and developers.

“Risk capital for juniors is unlikely to be available on any large scale in 2014. While the best development projects will continue to attract funding from the increasing pool of private capital, it may take a longer period of sustained commodity prices and cost control discipline across the sector before we see strong investor confidence and initial public offering markets open for juniors,” Downham said.

“Many juniors have effectively suspended exploration and development activities to conserve cash for survival. Without new capital and new investment, the mining sector may well be sowing the seeds for the next boom as supply falls short of demand.”