According to a report by Auhua Finance Online on February 25, as international ore prices continue to decline and the mining sector in the securities market remains sluggish, many Australian mining companies are facing a challenging financing outlook. According to the latest report released by EY, with the entry of private capital and Asian investors, Australia’s mining industry is experiencing both opportunities and challenges in terms of financing. 2015 will be a turbulent year marked by a major realignment of mining capital in Australia, with a surge in IPOs and mergers and acquisitions, as well as continuous innovation in financing methods.

　　According to the industry report “Mergers and Acquisitions and Financing in the Mining and Metals Sector: Trends and Outlook 2014,” released by EY on the 23rd of this month, the number of M&A deals in Australia’s mining and metals sector declined for the fourth consecutive year in 2014, dropping from 178 deals in 2013 to 144 deals last year—the lowest level since 2003. Moreover, the total value of mining M&A deals in Australia also hit a 10-year low last year, falling from US$5.5 billion in 2013 to US$4.7 billion last year. From an industry-wide perspective, M&A activity in the global mining sector has also been sluggish, with only 544 M&A deals taking place last year, totaling US$44.6 billion—a level that is also the lowest in a decade. EY believes that, amid volatile ore prices and a seeming “dormant” state of mining assets, the transfer of mining projects, forced asset sales, and the entry of private capital are likely to once again drive the pace of mining M&A activity in 2015.

　　Australia’s mining industry is currently at an awkward juncture—caught between a global supply rebalancing and the uphill battle faced by emerging miners. Most mining companies are constantly weighing the trade-offs between short-term performance and long-term benefits, striving to maximize capital returns. Paul Murphy, head of Mining and Metals Trade at EY Australia and the Asia-Pacific region, points out that Australian miners are now facing unprecedented challenges in terms of financing and resource allocation. It would be far from wise for Australia’s mining industry to rest on its laurels; mining companies need to re-examine their asset portfolios and capital allocations to find new avenues for growth. Murphy notes that companies in the industry are eagerly anticipating that the capital they’ve raised will soon generate the expected returns, leading them to favor short-term decision-making—a trend that has almost become a prevailing mindset in certain segments of the industry. However, after carefully considering the cyclical nature of the mining sector and its characteristic of “early investment, delayed output,” EY advises mining companies to adopt a more long-term perspective when making decisions.

　　Based on past experience, companies typically weather economic downturns by cutting costs, reallocating internal resources, and boosting productivity. However, management teams that successfully lead their companies through tough times place greater emphasis on how the company can generate tangible benefits for shareholders—and make immediate decisions with an eye toward creating value for the enterprise’s long-term growth. After examining capital flows over the decade from 2003 to 2013 among 30 publicly listed mining companies worldwide, Ernst & Young found that companies focusing heavily on “production and construction” tended to perform slightly worse, while those emphasizing “capital recycling” delivered the best results; companies skilled in “mergers and acquisitions” fell somewhere in between. According to Murphy, mining companies generally hesitate to address problems through mergers and acquisitions. In recent years, the total capital of mining companies has often suffered impairment following M&A deals, turning these transactions into cautionary tales for the industry. Murphy points out that some companies’ reluctance to pursue M&As not only overlooks the substantial benefits early acquisitions might bring later on but also fails to consider that the overall returns from a successful merger could well exceed those from investing in diversified asset portfolios. Currently, the frequency of mining M&As in Australia has hit a ten-year low. The key now lies in whether companies can choose the right timing for their acquisitions—because firms that act preemptively often enjoy significant advantages over their peers.

　　EY expects that in 2015, private capital investment in the mining sector will undergo a significant shift. In recent years, private equity firms have substantially increased their financing commitments to Australia’s mining industry; however, not all of this capital has yet flowed into every mining company. Sector-specific investments are gradually being scaled back, and in 2014, there were virtually no major new investments made. Mining stocks ended last year on a downward note.