No stone unturned in the M&A market

The first half of 2010 saw a flurry of merger and acquisition (M&A) activity in the global mining sector with no stone being left unturned to discover deal opportunities.

According to a report by PricewaterhouseCoopers (PwC), 1,324 mining deals worth an aggregate US$104 billion have been announced to date to August 15, 2010, and the pace of deal-making will likely speed up for the rest of the year. In fact, deals in 2010 are expected to outpace the 2007 peak of 1,732 deals worth US$159 billion.

In addition to an overall increase in deal volumes, expansion into new geographies, diversification of resource bases and an overall return to risk have characterized activity in 2010.

Tracking the growth

The deal frenzy for the global mining sector is unique. High deal values and volumes of mining deals are a contrast to the broader deal market where global volumes remain approximately 25% below peak.

Deal volumes in global mining are especially noteworthy in light of the level of activity seen in recent years. During the past five years, nearly 8,000 global mining deals have been announced with more than 1,000 deals per year since 2005. No other global sector has seen such a consistently high volume of deal-making.

Gold, silver, iron ore, coal and copper continue to dominate global mining M&A activity. Indeed, companies with interests in these key resources represent 84% of all takeover targets measured by value and 74% of all targets measured by volume. Gold remains the frontrunner as nearly 40% of all acquisitions were of entities with a major interest in gold in 2010. At the same time, we’re seeing new types of resources like fertilizer and rare earth materials becoming growing sources of interest for global mining firms — the current takeover battle for Canada’s Potash Corp, the most talked about global mining deal of the year, being a case in point.

Asia as a key deal-maker

Buyers headquartered in North America, largely Canada, still remain the most active acquirers of global mining assets. In fact, 49% of all global mining deals in the first half of 2010 involved at least one Canadian or American buyer.

However, acquirers from the Asia/Pacific region, most notably China, are intensifying deal-making in the mining sector. In fact, approximately 21% of all deals year-to-date involved an Asian acquirer, up from less than 10% a decade earlier.

Worth mentioning is that many of the Asian-led deals announced in 2010 were strategic partnerships rather than full acquisitions. This is largely because miners are increasingly looking to secure offtake or royalty agreements with Chinese entities as a means to finance projects. On the flip side, Asian buyers are primarily motivated to secure long-term resources at a fixed price ahead of further planned industrialization and urbanization, especially in China. This new transaction type is one of the key reasons why deal volumes in the global mining sector are continuing to rise.

The outlook

M&A activity in the global mining sector is not showing signs of slowing down for the remainder of 2010. In fact, we expect to see deal activity in the global mining sector to intensify during the last half of the year.

Despite short-term volatility of commodity prices, today’s resource market remains ideal for deal-making for global miners. Overall, most commodities have experienced 10 years of appreciation and we’re seeing an increased demand for resources to fuel the industrialization of emerging countries, which will help drive deal-making well into the future.

For more information, or to download the full report, please visit www.pwc.com/ca/MiningDeals.