Highlights
Number of deals in 2007 rose 69% from 2006 to 1,732
Total transaction value was US$158.9b, up 18% from 2006
Number of US$1 Billion deals tripled in 2 years from 8 in 2008 to 25 in 2007
Total value of mining deals conducted by Chinese and Russian companies rose six fold, from US$5.3 billion in 2005 to US$ 32.7 billion in 2007
Each passing year seems to set a new record for the biggest mining deal in history. The PwC report mentions that “In 2005, the biggest deal was Inco’s US$13.8bn move for Falconbridge. In 2006, it was Freeport-McMoran’s US$25.8bn purchase of Phelps Dodge. In 2007, Rio Tinto set a new top deal bar with its US$43bn swoop for Alcan and its substantial aluminium assets.” In 2008, “BHP Billiton began the year bidding to takeover Rio Tinto with a potential deal value over the US$150bn mark that would shatter all previous records.” However, talks between the two companies have stalled for the moment. The PwC points out that further evidence of this consolidation and merger activity in the mining industry is “evidenced by rumours that Vale will bid for Xstrata in a deal that could be worth US$90bn.”
So what is spurring this merger and acquisition mania in the mining industry?
The PwC report points out that “High commodity prices, buoyant market capitalisations and optimism about the industry’s long-term growth and profitability, with sustained demand in Asia outstripping fluctuations in western demand, have seen mining companies embarking on ambitious long-term growth strategies.” Basically, M&A is “being used to gain greater diversification by the biggest players and to acquire resources to meet demand by all players. With less recent exploration, resource pipelines need filling. At the same time, exploration costs are at all-time highs, permitting is taking longer and companies also face skills’ shortages. These are significant barriers to meeting what is a major upturn in world demand. With companies sitting on big cash positions, M&A is an important way of overcoming these challenges.”
The report mentions that significant deal volume is emerging from companies in Russia and China including the second and third largest deals of 2007. While most of this action is domestic in nature, in the instance of the second largest deal in 2007, “Rusal’s US$13.3bn investment for a 25% stake in Norilsk Nickel – could produce giants to rival the likes of BHP Billiton and Rio Tinto.” Meanwhile, Chinese companies too, have been accumulating stakes and purchasing companies such as their “US$796 million worth of stake-building in Anglo American in 2006 by China Vision Resources, an investment vehicle of Larry Yung, one of China’s richest men, Chinalco’s US$789 million purchase of Peru Copper, a Canadian-based mining company, completed in July 2007; China Minmetals and Jiangxi Copper’s agreed US$450 million cash bid for Canadian-listed company Northern Peru Copper in December 2007; Sinosteel’s 2007 US$1.1bn bid for Midwest Corporation, an Australian iron ore explorer.”
In a general sense, private equity has not been a huge player in the mining sector. The reason for this, according to the PwC report is because “risk-reward equation in the mining industry limits the scope for using debt and the need for specialist mining expertise prohibits the additional management value that can be injected.”
In 2007, Canada was the primary focus of mining deal activity with total deal values hitting US$77.1 billion. However, in 2007 the engine for growing total deal value turned to the Asia Pacific region where deal value grew by US$24.2bn. This growth was fuelled by “intense worldwide competition for Australian resources” as “seven out of the top ten Asia Pacific deals were for Australian resources with all but two buyers coming from outside Australia.”
More locally, 2006 sparked the beginning of a trend of foreign takeovers in the mining industry in Canada. With Vale’s purchase of Inco and Falconbridge, Canda’s largest nickel producers in 2006, the US$5.4bn purchase of LionOre by Russia’s Norilsk Nickel and Rio Tinto’s purchase of Alcan in 2007, the PwC report surmised that foreign buyers were “drawn to the advantages of investing in a politically stable environment,” i.e. Canada.
With greater than 90% of North American mining deals originating in the diversified, base metals and other segments of the market, the precious metals markets seemed to be left out of the mix. Despite gold’s rise to just over $840/oz and silver’s ascent to $16/oz, the only significant deal in this sector was three way deal where Yamana Gold first acquired Northern Orion Resources and then followed up by purchasing Meridian Gold.
Looking forward, the PwC report states that consolidation in the mining sector has a far ways to go in a number of sectors and “the trend towards super-consolidation will add to the consolidation imperative.” Fuelled by an overarching will to fill production pipelines and the need for diversification, deals in the mining sector look set to continue. Particularly in the fragmented copper and lead/zinc sectors, there is tremendous potential for M&A activity, the PwC report says. With the ongoing credit crisis, some exploration companies might enter into friendly deals with larger companies or end users as a means to secure financing. Additionally, the “stock market falls of early 2008 have made some targets much cheaper and may lead to a spate of hostile offers.” In conclusion, the report calls for deals in the mining sector to remain strong. While a chain of “super-deals” may reshape the top echelon of mining companies, the need to grow production and cut costs by scaling operations will serve as impetus for consolidation in the mid to smaller capitalization companies.
“Economic slowdown in the US, continuing financial market uncertainty and fears of actual recession will inevitably cast a cloud of uncertainty over the period ahead. From the macro-economic point of view, much will depend on the continued sustainability of Asian demand. Instabilities are likely to deliver a bumpier deal-making ride although the fundamentals for M&A activity in mining remain strong.”
Courtesy: PricewaterhouseCoopers
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