Mining and metals industry records 67% uptick in deal value in 2011: Ernst & Young

M&A temptation on the rise with decreased stock prices

VANCOUVER, Nov. 9, 2011 /CNW/ - A 67% increase in deal value totalling US$132 billion reveals cashed-up mining and metals companies are taking advantage of recent declines in valuations to pursue mergers and acquisitions (M&A) this year, says Ernst & Young.

"Low gearing, strong earnings and good capital availability created an ideal environment for M&A this year, but jittery markets and wavering confidence caused activity to slow in Q3," says Tom Whelan, Leader of Ernst & Young's national Mining & Metals practice. "In fact, deal volume dropped 6% in the first nine months of 2011 to 779 deals, compared to 827 deals for the same period in 2010."

Economic turbulence found its way into commodity prices and put deals on ice in the third quarter after a six-month streak of M&A. Not only that, economic and political instability continues to create a scarcity of new large-scale, quality assets in traditional resource geographies that's driving greater interest to frontier markets.

Volatile markets are making it more difficult for companies to price risk and could explain the relatively low likelihood of M&A despite improving conditions, commented Whelan.

"Macroeconomic issues and resource nationalism are also making M&A decisions difficult for mining companies," says Whelan. "But with the decrease in market capitalization of many mining companies, M&A may be more tempting, as the growing skills shortage risk increases the capital project execution risk associated with organic growth."

In fact, Ernst & Young's recent Global Capital Confidence Barometer shows that despite uncertain conditions, 50% of mining companies surveyed are geared up for growth with 39% intending to make acquisitions in the next 12 months.

"North America extended its lead for total deal value around the world as intense coal consolidation heated up this year," says Whelan. "The strong strategic drivers for coal allowed it to dominate the M&A landscape, accounting for over $30 billion of $132 billion of total deal value."

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