Mergers and acquisitions activity in the mining sector declined significantly in the first half of 2013 according to a new report released by Ernst & Young.

The latest report by the global accounting firm says that mining mergers and acquisitions (M&As) continued to decline during the first half, as companies went on a cost-cutting binge and investor trepidation led to a withdrawal of funds from the sector.

The first half of 2013 saw a total of 350 M&A deals worth around US$78.6 billion. Deal volume was down by 30 per cent, although value increased by 41 per cent due to the presence of several mega deals.

Ernst  & Young points out that this marks the third consecutive year that deal volumes in the sector have logged a decline.

Mining IPO volumes and funds have also sunk to unprecedented lows, with only 12 IPOs launched in the first half of 2013, netting a mere $459 million in funds.

Proceeds derived from follow-on equity issues by juniors plunged as well, falling by nearly half year-on-year to $2.9 billion.

The Ernst & Young report says the slump in M&A activity is the result of companies seeking to slash expenses and optimize operations, particularly in resource rich first world countries such as Australia where costs continue to ride high.

“Management teams across the industry are focused on cost containment, margin improvement and asset optimisation at the expense of high risk capital expenditure, acquisitions or exploration,” says the report.

The confidence of investors in the mining and metals sector has also been shaken by easing growth in China, the world’s second largest economy and a voracious consumer of minerals and resources, and concomitant declines in spot prices for key commodities such as iron ore and coal.

Investor trepidation has seen a withdrawal of funds from mining and resource shares and their subsequent allocation into other sectors.

“The capital raising market environment in 2013 is marked by volatility and appears to be punishing the mining and metals industry more than others,” says the report.

Companies are having difficulty finding buyers for assets they seek to spin-off, with BHP recently calling off the sale of its under-performing Gregory coal mine due to a tepid market response.

Ernst & Young says the best means for reversing this trend will be gains in spot prices for key commodities.

“A sign of sustained improvement in commodity prices may be the trigger needed to accelerate competitive buying activity of the many divested assets coming to market,” it says.