PRICEWATERHOUSE COOPERS REPORT
Mining deals will hit record levels in era of super-consolidation
What ever a mining company’s size, a Pricewaterhouse Coopers report advises that miners cannot be complacent about their M&A strategies in what will emerge as another year of landmark deals.
Author: Dorothy Kosich
Posted: Tuesday , 18 Mar 2008
RENO, NV -
A PricewaterhouseCoopers report released today suggests that landmark M&A deals may reshape the top-tier mining companies this year as consolidation will continue to be a strong deal driver among mid-tier and smaller companies.
In their report, Mining Deals 2007 Annual Review, PwC's Global Mining Deals Team said, ‘2008 looks set to see mining deals reach very high record levels as super-consolidation takes place in the market."
Despite the credit crunch, the report finds "little evidence of a slowdown in [mining] deal activity."
PricewaterhouseCoopers advises that 2008 will be "the year of super-consolidation as the giants of the mining and metals sectors seek combination that will increase their worldwide scale." This consolidation trend may include also players from China and Russia. The report indicates that state-owned enterprises and companies not immediately associated with mining will continue to influence the strength of the mining M&A market.
Meanwhile, as some exploration companies struggle to gain development funding, PwC advises that the situation "opens the door to friendly deals with big companies or end users wishing to secure inputs. Also, among smaller companies, the stock markets falls of early 2008 have made some targets much cheaper and may lead to a spate of hostile offers."
PricewaterhouseCoopers advises that mining is "in a phase of major structural change, with consolidation of the mid-tier and among smaller companies and the emergence of the super-majors among the biggest diversified companies." They noted that the deals have become a "key mechanism" for filling the pipeline of development projects and diversifying corporate portfolios "in terms of both commodities and geology."
"Underpinning these trends is the quest for world scale, resource acquisition and resource diversification," the analysts asserted.
The study noted that exploration costs are at all-time highs, permitting takes longer, and mining companies are facing skills' shortages. "These are significant barriers to meeting what is a major upturn in world demand."
Interestingly, Pricewaterhouse Coopers found that private equity buyers aren't as active in the mining sector. "The 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." Nevertheless, U.S. private equity firm Apollo Management acquired the Noranda Aluminum assets from Swiss mega-miner Xstrata in a $1.15 billion deal in 2007.
THE YEAR THAT WAS
Mining M&A deals and total deal value reached record highs last year. M&A deals increased 69% to a total of 1,732 with an aggregate transaction value up 18% to nearly US$159 billion. PricewaterhouseCoopers found that the number of $1 billion-plus deals tripled in two years from eight in 2005 to 25 in 2007. However, 90% of all mining deals in 2007 involved transactions of US$250 million or less.
Base metals companies, coal, uranium and mineral sands sectors are experiencing the major growth in deal activity, the report noted.
The total value of mining deals conducted by Chinese and Russian companies rose six-fold to US$32.7 billion in 2007, including the second and third largest deals in the industry, both involving Norilsk Nickel.
"Much of the activity is domestic, but the early 2008 high profile intervention by Chinalco in the battles of Rio Tinto highlights a growing series of expansion moves," PwC suggests. "Foreign purchases by Chinese and Russian companies furthered momentum in 2007 with Chinalco's US$789 million purchase of Peru Copper, a Canadian-based mining company; Sinosteel's US$1.1 billion bid for Midwest Corporation, an Australian iron ore explorer; and Russia's Norilsk Nickel's US$5.4 billion all-cash purchase of Canadian nickel miner LionOre."
Total deal value for assets in the Russian Federation increased 16% to US$19.1 billion. The report also proposes that UC Rusal's $13.3 billion investment for a 25% stake in Norilsk Nickel-the second largest overall global mining deal of 2007-"could produce giants to rival the likes of BHP Billiton and Rio Tinto."
In the remainder of the world, the largest number of deals and total deal value involved Africa and South America. Deal numbers increased 81% from 52 to 94 in Africa and 51% from 115 to 174 in South America. PwC found that Africa accounted for the largest total deal value with $13.5 billion in deals in 2007, up 38% from 2006.
South America's total deal value increased slightly from US$8.6 billion to US$8.7 billion in 2007. The biggest 2007 deal for the continent was for Anglo American's 49% stake in Brazil's MMX Minas-Rio Mineracao e Logistica.
The study found that "international competition for Australian mining assets has reached record levels.' The analysts determined that a possible tax change, combined with the credit crunch, "currently places those that hold significant cash balances at a definite advantage." Meanwhile, Chinese, Indian and Russian companies with hefty cash balances "have a significant comparative advantage over a rival suitor that wishes to move forward using its shares as currency" for Australian mining acquisitions.
While North American deals were valued at US$77.1 billion last year (a 7.3% decline over 2006), the study found the number of deals more than doubled from 310 to 695. "Canadian companies, in particular, proved attractive to foreign buyers drawn to the advantages of investing in a politically stable environment. Alongside this, there was considerable consolidation as mid-cap North American mining companies took the opportunity to scale up with a number of mutually strategic fits with counterpart companies," the report noted.
PwC determined that more than 90% of North American mining deal value was in diversified, base metals and other mining companies, while gold mining deals declined in 2007.
The report revealed a significant increase in major deals involving Asian Pacific mining assets, including seven US$1 billion-plus deals and eight $550 million deals in 2007. Xstrata headed the list of Asia Pacific deals with its US$2.9 billion purchase of Australian nickel company Jubilee Mines.
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