Blistering pace of Mining M&A grinds to a halt after the half-year mark; Slowdown likely temporary: PwC report

China well positioned to make opportunistic buys and lead a rebound in global mining M&A

TORONTO, Sept. 7, 2011 /CNW/ - Signs point to a slowdown in global mining mergers and acquisitions (M&A) in the second half of 2011 after a strong start to the year. Deal values and volumes have already decreased by 32% and 19% month over month in July and a further 25% and 7% respectively in August, according to PwC's new Mining Deals report released today. On aggregate, deal values and volumes have declined by 49% and 25% over the last two months.

In the first half (1H) 2011, there were 1,379 deals announced worth US$71 billion, making it the busiest half year of M&A in the mining sector's history. On an annualized basis, deal volumes and aggregate values were 24% and 2% higher than 2010, and 122% and 32% higher than 2009. Average deal values during 1H 2011 were $104 million—40% higher than 2010. For the remainder of 2011, however, jittery global equity markets will likely put downward pressure on most mining company valuations for the near term.

"For the time being, politics have taken commodity markets hostage. Although a drop off in deal-making is expected, it will not cease altogether as China's demand for metals continues to drive long-term fundamentals in the mining M&A market," says John Nyholt, National Leader of Transaction Services, PwC.

PwC doesn't believe this is the end of an era of unprecedented global mining M&A. Chinese demand supported by other emerging nations, is the most critical factor in formulating the commodity market and, therefore, mining M&A expectations. "While Western world financial commentators operate on three-month forecasts, the Chinese are operating on longer term plans, making this blip largely irrelevant in the grand scheme of things," adds Nyholt.

Quiet on the Canadian front
Despite record overall activity during 1H 2011, the usual deal-makers from Canada, Australia and the UK were quiet. PwC did observe, however, a flurry of activity led by US buyers, especially in the coal sector. In 1H 2011, US entities overtook Canadian entities as the most acquisitive buyers with 31% market share by value in announced acquisitions. With 19% market share by value, Canada was bumped to second place, while typically acquisitive Australia stood at only 4%.

Steelmaking ingredients dominate
Steelmaking ingredients metallurgical coal, iron ore and niobium dominated deal making activity during 1H 2011 with over 30% of activity. Coal surpassed gold as the most targeted resource by aggregate deal value as companies sought to consolidate their resources to increase exposure to the raw material needs of the emerging markets. Mining companies are also increasing deal-making outside of the mining sector. As such, complementary sectors including extractive industries like natural gas, which is required for functioning mining operations, will likely be targets for M&A. A key threat for western buyers in closing deals, however, stems from increasing shareholder and board pressure to deploy capital into organic growth or share repurchases and dividends.

China quiet in 2011, but poised to capitalize on opportunistic downturn
In 1H 2011, Chinese entities announced 75 acquisitions worth US$4.7 billion (excluding cancelled and withdrawn deals), a decrease of 18% over the prior year. When active, Chinese entities stayed close to home with 68% of acquisition targets headquartered in Asia/Pacific emerging markets. 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.

"China walking away from two potentially iconic transactions due to valuation concerns was rather symbolic and further dispels the notion that Chinese entities operate in favour of securing supply at any price," says Nyholt. "We witnessed many instances of Chinese entities managing for profit, not supply, through 2011. Going forward, we expect that political and economic forces within China will incite continued discipline in buy-side M&A activity."

Caution, however, does not amount to a sharp decline in China-led M&A activity. 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. PwC also anticipates China will continue to focus on frontier markets, such as Mongolia and Africa, and further consolidate its fragmented domestic mining sector.

"Chinese buyers have been quietly amassing minority positions in many companies and they are now going to start exercising their influence, especially if there is an opportunistic downturn," says Nyholt.

In fact, PwC views Chinese ownership interests as an emerging deal hurdle for takeovers as 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. There have been two instances of such resistance this year.  In December 2009, Rio Tinto announced a US$3.8 billion takeover of Riversdale Mining. The transaction was only recently closed because steelmaker shareholders, Tata Steel and CSN (together 47% of the register), were keen to retain their position to ensure security of supply from Riversdale's Zambeze coal project. Peabody Energy is also currently experiencing pushback from shareholders China's Citic Resources and Korea's Posco (together 30% of the register) in its bid for Macarthur Coal.

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

Follow PwC on Twitter at @PwC_Canada_LLP and on Facebook at http://www.facebook.com/pwccanada.

About PwC's Deal Team
PwC's Deal Team (www.pwc.com/ca/deals) helps clients to achieve deal success—from concept to close and beyond. As part of the world's largest Transaction Advisory practice1, and with our global Corporate Finance group being 2010 Upper Mid Market M&A Advisor of the Year2, the PwC Canada Deals Team is your gateway to an exciting new world of emerging M&A opportunities.

About PwC
The firms of the PwC network provide industry-focused assurance, tax and advisory services to enhance value for clients. More than 161,000 people in 154 countries in PwC firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. In Canada, PricewaterhouseCoopers LLP, an Ontario limited liability partnership, and its related entities have more than 5,700 partners and staff in offices across the country. See www.pwc.com/ca for more information.

"PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.

Note to Editors: PwC changed its name from PricewaterhouseCoopers to PwC in the fall of 2010. "PwC" is written in text with a capital "P" and capital "C." Only when you use the PwC logo is the name represented in lower case.

1 Source: Kennedy;"Business Advisory Services Marketplace 2009-2011" ©BNA Subsidiaries, LLC. Reproduced under license.
2 Source: Acquisitions Monthly Awards 2010

SOURCE PwC

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Tel.: 416 365 8858
Email: david.rowney@ca.pwc.com

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Jessica Draker
Tel.: 613 755 8706
Email: jessica.l.draker@ca.pwc.com






 

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