The post-Covid rush has been driven by a surge in natural resources-related deals. 

dec team 2

Clockwise from top left: Russell Keating, Georgina Lalor, Tim Joyce, Stuart Owen

Merger and acquisition (M&A) activity in Australia has been noteworthy in 2021, as it recovers from a Covid-induced slump. The busiest advisor this year, at least by number of deals, has been Macquarie Capital. Paradoxically, its natural resources team saw equity transactions actually increase during lockdown.

As Covid took its toll on economic activity, annual Australian M&A declined from $97bn in 2018 to $55bn in 2020, according to Dealogic. In the year to late October 2021, however, volumes had already surged to $203bn.

“We have seen a very big step-up in M&A from 2020 to 2021,” says Tim Joyce, co-head of Australia and New Zealand for Macquarie Capital, the investment banking unit of Macquarie Group. This year’s record volumes are more than double normal levels, he adds.

“One of the biggest drivers is the availability of private capital, from infrastructure firms, sovereign funds and [pension funds],” Mr Joyce notes. Other factors feeding resources M&A are energy transition and technology-driven digitisation, he adds.

“Transition is driving a lot of M&A, with the exiting of fossil fuels and more investment in electrification and digitisation minerals,” Mr Joyce says. These include: copper, which is heavily used in wiring; lithium, graphite and rare earth minerals — all of which are predominantly used in batteries; and nickel.

Counter-cyclical

Metals and mining M&A does not necessarily move in sync with the broader market, however. Between 2019 and 2020, while M&A in other sectors was slowing down, Australian mining mergers were on the increase.

“M&A for mining can be counter-cyclical, with reinvestment in anticipation of rising demand,” explains Russell Keating, Macquarie Capital’s head of resources.

Mr Keating notes that investment in mining was low, relative to other sectors from 2012 onwards, but began picking up again in 2019. “That drove transactions, regardless of Covid,” he adds. “Record price highs also drove a lot of activity in gold mining.”

While base-metal prices fell during Covid, many are now at or around record highs. The fall-off in mining investment coincided with the end of the last commodities supercycle, so is this the start of a new one?

“No,” Mr Keating insists. “With the shift out of carbon, and people now looking for future-proofing minerals, it’s the start of a structural change to the industry.” Within the next five to 10 years, metals and mining will be a completely different business, he believes.

Mr Keating points to an increased interest in vertical integration, as recent supply chain difficulties force companies to re-examine security of supply. This too feeds into M&A activity.

Then there is the nature of the assets themselves. Mining assets are limited, points out Stuart Owen, Perth-based executive director in Macquarie Capital’s resources division. “Mines are depleting assets, so the appetite to secure long-term supply has led to a lot of M&A activity,” he says. “Here in Australia, there is a pool of investors who understand mining.”

In September, Macquarie Capital was sole financial advisor to Sandfire Resources on its $1.865bn acquisition of Minas de Aguas Teñidas (Matsa). Sandfire is an Australian-listed copper miner with assets in Botswana and the US, while Matsa has an underground copper operation in Spain’s Iberian pyrite belt.

Macquarie was also joint lead manager and underwriter of a A$1.25bn ($930m) equity raising to part-fund the acquisition. That was more than the miner’s own market capitalisation at the time. Given that Sandfire was competing against a bigger player for Matsa, the ability to raise finance was key to its success.

“Australia has very deep capital markets, with a focus on financials and resources,” says Georgina Lalor, Macquarie Capital’s head of equity capital markets. “With this transformational Sandfire deal, some of our pension funds were able to work alongside the company and pre-commit a large proportion of the capital to the raising.”

Pension saving is compulsory in Australia, where pension funds, or “supers” as they call them, have been adding considerably to market liquidity. While Australia has the 10th-largest equity market in the world, its pensions industry is reportedly the fourth largest. “So, there is a large store of funds under management looking to deploy capital,” Mr Joyce says.

Adding to current Australian investor firepower are the big local banks who provisioned earlier against Covid and have since been returning considerable sums to shareholders. “They are looking to deploy that capital, and equity returns are attractive relative to fixed income,” Ms Lalor observes.

Late last year, Macquarie was joint lead manager and underwriter for a A$766m equity raising on behalf of IGO, a nickel, copper and zinc miner. This was to part-fund its A$1.9bn acquisition of 49% of Tianqi Lithium Energy Australia. The deal supported the company’s stated ambition to become a “globally relevant” pure-play battery minerals producer.

This April, as IGO pursued that strategy, Macquarie was sole financial advisor on the sale of its 30% stake in Tropicana Gold Mine to Regis Resources for A$903m.

Macquarie was sole global coordinator, joint lead manager and joint underwriter on the A$528m initial public offering (IPO) of 29Metals, a copper producer with mines in Western Australia and Queensland and a development project in Chile. This was the second-largest mining IPO on the Australian Stock Exchange since 2004.

The IPO was very well received, the bankers say. “It was a good example of support coming from international investors,” Ms Lalor says.

The prospects of some transactions were transformed by the recovery in metals prices. Macquarie was financial advisor to Pilbara Minerals on its $175m acquisition of the neighbouring lithium operations of Altura, which was in receivership. It was also sole lead, underwriter and bookrunner on the A$240m equity raising that funded it.

Mines are depleting assets, so the appetite to secure long-term supply has led to a lot of M&A activity

Stuart Owen, Macquarie Capital

“This was just as the lithium price started to recover,” Mr Owen recalls. “Timing was everything. Pilbara’s market cap was less than A$1bn at the time — now it’s A$6.5bn.”

In September, Sibanye-Stillwater, a South African platinum group metals miner with interests in the US, agreed a 50/50 joint venture with Australia’s Ioneer. It gives Sibanye a 50% stake in a Nevada lithium-boron project for $490m. Sibanye also paid $70m for a private placement of Ioneer shares. Macquarie was financial advisor to Sibanye on both legs of the deal.

Macquarie was also a joint lead manager and bookrunner on a A$100m institutional placement for Chalice Mines. Chalice intended to use the proceeds to accelerate exploration and development at its Julimar nickel, copper and platinum group metals project in Western Australia.

“It looks to be a high-quality project,” Mr Owen observes. “But in a normal environment, they could never have raised that quantum of funding.”

Consolidation

While miners embrace new realities, the oil and gas sector is undergoing consolidation. Macquarie was financial advisor to Oil Search in its A$21bn all-share merger with Santos, agreed in September. Both companies have oil and gas assets in Papua New Guinea.

The combined business will also have interests in Alaska and Australia. It moves into the S&P ASX-20 index of top Australian companies and becomes one of the 20 biggest global oil and gas players, with all the funding advantages that confers.

The Macquarie team is enthusiastic about prospects for the sector, believing that the need for raw materials will continue to grow, driven by further urbanisation, growth in Africa and large parts of Asia, renewables and electrification.

“Mining is at the fulcrum of what will happen,” Mr Keating says. “As grade profiles decline, more money will also be spent on mine efficiency, squeezing every ounce of juice out of the mining lemon.”

This remains a very global sector, sensitive to international geopolitics and trends. The ongoing stand-off between Australia and China, until recently the biggest buyer of its minerals, has not impacted M&A deal flow, Mr Joyce says.

“We expect strong demand for commodities, which are very important to Australia,” he adds. “The mining sector has been very relevant in terms of capital flows and M&A, and we think that trend will continue.”

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