Monsters of Rock: Energy transition powers dealmaking as global resources firms sit on US$300bn war chest

Bain and Co. say the energy transition has become a key theme for energy and natural resources companies
Share of global M&A deals in the sector focused on the energy transition rose from 21% in 2021 to 27% in the first 9 months of 2022
Momentum for energy transition deals expected to rise with industry sitting on mega US$300 billion cash warchest

Consultants Bain and Co. say over a quarter of all deals made by energy and natural resources giants in the first three quarters of 2022 were focused on tapping into the energy transition.

In a new M & A report, Bain says the proportion of deals made by energy and mining firms in the energy transition thematic continues to grow, from 21% in 2021 to 27% through to September 30 2022.

And more is expected to come.

While the global M & A pipeline staggered in the second half of 2022 as bearish economic conditions set in, with a 36% decline in M&A value to US$3.8 trillion in response to US interest rate hikes, the energy and natural resources sector is more cashed up than any other after megaprofits in recent years.

“We think this trend toward portfolio rebalancing will accelerate in 2023 and the coming years. In the Bain M&A Practitioners’ 2023 Outlook Survey, 72% of energy and natural resources respondents said the most common investment thesis will be either expanding into new areas of business or building new engines of growth,” Whit Keuer and Arnaud Leroi said.

“This comes at a time when ENR companies are flush with more cash than any other industry ($300 billion), although with some discrepancies between sectors and regions. This will fuel their investments in the energy transition.”

Miners stumble through arvo session but remain ahead

Major mining stocks have moved to a 0.75% gain, down from earlier lifts for the materials sector of 1.21%, as an arvo pullback saw them lose some of their outsized gains.

But the big diggers remained ahead, with Rio Tinto (ASX:RIO) up 1.6%, IGO (ASX:IGO) 1.37% higher, Allkem (ASX:AKE) up 1.46%, South32 (ASX:S32) climbing 1.98% and Lynas Rare Earths (ASX:LYC) 3.51% better off.

Iron ore miners were strong performers among the mid-tier miners, with Grange Resources (ASX:GRR) lifting 4.93% and Champion Iron (ASX:CIA) 3.78% higher.

Meanwhile Sandfire Resources (ASX:SFR) (+3.52%), Alumina (ASX:AWC) (+3.51%) and Arafura Rare Earths (ASX:ARU) (+10.91%) were also strongly supported.

Meanwhile, Goldman Sachs lowered its price targets on OZ Minerals (ASX:OZL) ($23.7 per share to $21.4/sh) and IGO ($14.1/sh to 13.6/sh), though any price targets on OZ are immaterial if its $28.25/sh cash sale to BHP goes through.

GS analysts Paul Young, Hugo Nicolaci and Caleb Heiner say their 2023 earnings per share for IGO are down 4% on higher nickel costs and lower production, offset by higher lithium earnings, while they see FY24 earnings lower on a pricing mechanism that increases IGO’s exposure to spot indices.

GS is bearish on long term spodumene prices, forecasting a drop from US$5364/t in FY23 for SC6 (6% Li2O) to US$2086/t in FY24 and US$800/t in FY 2025, before rebounding to US$1142/t by 2027.