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
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
"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
"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
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About PwC's Deal Team
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emerging M&A opportunities.
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1 Source: Kennedy;"Business Advisory Services Marketplace 2009-2011" ©BNA
Subsidiaries, LLC. Reproduced under license.
2 Source: Acquisitions Monthly Awards 2010
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