TORONTO (miningweekly.com) – Only 24% of global mining and metals companies will focus on mergers and acquisitions (M&A) in the next six months, despite 57% of companies viewing the economy as improving – up from 21% in October, auditing firm Ernst & Young's (E&Y’s) eighth twice-yearly Capital Confidence Barometer revealed on Tuesday.

"Confidence in the global economy is up but deals in the sector – and the appetite to do them – are down as weaker commodity prices, cost inflation and labour unrest take their toll. These forces have driven companies to take drastic measures to reduce their operating costs, including staff reductions and mine closures,” E&Y Canadian mining and metals leader Bruce Sprague said in a statement.

Total deal value fell by 45% year-on-year to $16.3-billion, while deal volume fell by 35% to 168 deals in the first quarter of this year.

However, while deals may be off the boardroom agenda, growth was still top of mind for 44% of mining and metals companies, Sprague added.

"Companies are looking at how they can achieve growth from a stronger operating base. They're opting for lower-risk organic growth, optimising capital allocation and strategic divestments rather than M&A. For those where M&A is still a priority, [we can] expect to see smaller, bolt-on acquisitions,” he explained.

Ninety-one per cent of deals in the latter half of this year were expected to be valued at below $500-million, up from 74% in October 2012, as companies take care not to jeopardise balance sheet agility and credit ratings.

"Companies with the best approach to capital planning will come out on top in the next investment cycle. Opportunities will always exist for those willing to take a long-term view of the sector. It's about balancing cost reduction and operational efficiency efforts with strategic transactions – especially during this time of depressed valuations, which could provide attractive returns on deals,” Sprague said.

The rising valuation gap and increase in divestment activity were creating a buyer's market for non-traditional investors. More and more private equity and sovereign wealth funds were seen entering the market, securing supply and seeking financial return on undervalued assets.