More mergers and takeovers of mining and resources companies in Australia are on the cards as the sector grapples with the continuing slide of the price of commodities, according to a new report released by Deloitte today.
Commenting on the report, Deloitte’s Financial Advisory Services partner Nicholas Harwood said, “Continued pressure on the sector can be expected to lead to an increased number of transactions and some opportunistic merger and takeover offers.”
However Mr Harwood said the sector was proving resilient overall and rapidly adapting to the new economic climate.
“If there is an upside, sustainable cost reduction initiatives, diversifying business activities, increasing cash management and debt reduction, and expanding capability through organic initiatives, acquisitions and alliances are driving change, ” Mr Harwood said.
“Falling iron ore prices and the dwindling pipeline of new projects are well documented. They are impacting miners in terms of profitability and market capitalisation, and these impacts are, not surprisingly, also being felt by those in the mining services sector.
“In Q4 2014, there was some improvement in sentiment towards the top 10 participants (which comprise 84% of the Index), with the market capitalisation of five improving and five deteriorating.
“The net movement in the market capitalisation for the top 10 participants was a decline of $1.2 billion relative to total Index market capitalisation of $31.9 billion. This highlights that the deterioration in the Index was caused as much by the top 10 participants as by the other 40.
“While some Index participants reported revenue increases, and initiatives to reduce costs and improve productivity, market forces and competitive pressures have caused many to suffer reduced margins and larger profit swings relative to revenue movements.
Access Economics partner with Deloitte, Stephen Smith, said, “Our mining services sector is dealing with increasing uncertainty around new projects, with access to capital proving difficult, and explorers experiencing delays to expectations for the timing of approvals.
“Much of the industry has implemented cost reduction initiatives, but more needs to be done, to accelerate sustainable change through this phase of the resources cycle.
“The US economic recovery, among other factors, is driving a weakening of the AUD/USD exchange rate which, on balance, should be beneficial for the industry.”