Minin M&A Slowdown Likely a Blip on the Radar

What a year of two different halves. The first half of 2011 was the busiest half year of mergers and acquisitions (M&A) in the mining sector’s history, but the summer saw the flurried pace of activity virtually grind to a halt.

A recent PwC Mining Deals report documented the recent slowdown: deal values and volumes decreased by 32% and 19% respectively month-over-month in July and a further 25% and 7% in August. Since June, aggregate deal values and volumes declined a whopping 49% and 25%. For the near term, jittery global equity markets will likely continue to put downward pressure on most mining company valuations.

Contrast this with the first half (1H) of 2011 when 1,379 deals were announced worth a total of US$71 billion. Yet, despite record overall activity during 1H 2011, the usual deal-makers from Canada, Australia and the UK were unusually quiet. The exception was the US, which feverishly struck deals, especially in the coal sector. In fact, the US overtook Canada as the most acquisitive buyer in terms of value, with 31% market share vs. 19% by value of announced acquisitions. Canada retains its position as the most acquisitive buyer in terms of the number of transactions, accounting for 40% of all deals during 1H 2011.

The end of unprecedented global mining M&A?

Given the drop off, is it reasonable to assume that this is the end of an era of unprecedented mining M&A? The answer is not likely. The slowdown is likely temporary as mining companies prefer to stick to the sidelines and wait for the global economy to settle.

It’s not all quiet on the commodity front either. Steelmaking ingredients such as metallurgical coal, iron ore and niobium dominated deal activity in the first half of 2011, representing 30% of activity. We’ve even seen a $2 billion deal for niobium, a rare metal used in the manufacturing of specialty steels. Coal surpassed gold as the most targeted resource by aggregate deal value as companies sought to consolidate their resources to increase exposure to emerging market needs. We’ve also seen a rise of mining companies striking deals outside of the mining sector. As such, complementary sectors, including extractive industries like natural gas-required for functioning mining operations-will likely be increased targets for M&A.

China poised to capitalize on opportunistic downturn. In the first half of 2011, Chinese entities stuck close to home with 68% of acquisition targets headquartered in Asia/Pacific emerging markets. Yet, lacklustre Chinese buy-side volumes were not for lack of desire as evidenced by two notable takeover attempts of Australia’s Equinox Minerals and Whitehaven Coal that both failed on valuation grounds. These missed attempts are particularly symbolic as they dispel the notion that Chinese entities are in favour of securing supply at any price.

Going forward, China is expected to continue acquiring gold and other precious metals, as well as quality industrial resource assets like iron ore, metallurgical coal, fertilizer minerals and base metals. Chinese buyers have also been quietly amassing minority positions in many companies and are now going to start exercising their influence, especially if there is an opportunistic downturn. In fact, we view Chinese ownership interests as an emerging deal hurdle for takeovers as Chinese minority shareholders exert their rights. This is a natural by-product of a decade long trend of joint venture and/or minority position financing deals structured to ensure supply of key commodities for steelmakers and state-owned enterprises.

How will the M&A market return to where it was? We believe China will be the major driver behind mining M&A-now and in the future. Chinese demand for metals, supported by other emerging nations, is the most critical factor in formulating the commodity market and, therefore, mining M&A expectations. Just think, while Western world financial commentators operate on three-month forecasts, the Chinese are operating on much longer-term plans. This makes this blip largely irrelevant in the grand scheme of things.

For more information or to read the full Mining Deals report, visit: www.pwc.com/ca/MiningDeals.