Disciplined M&A approaches, smaller digestible deals and a focus on transparency lie ahead for miners
TORONTO, March 5, 2013 /CNW/ - After a slow and cautious 2012, mining M&A activity is expected to continue at a moderate and cautious pace in 2013 as metal prices stabilize and companies bet on a continued rise in commodity demand from countries such as China, according to the latest Mining Deals report by PwC to be released this week.
There were 1,803 transactions in 2012 - the lowest level since 2005. Deal volume in 2012 also decreased more than 30% as compared to 2,605 transactions in 2011. The value of mining deals also slipped in 2012, as compared to 2011, with the total of M&As amounting to $110 billion in 2012 (including the $54 billion value of the Glencore/Xstrata merger which was announced last February and has now nearly cleared all regulatory approvals). Without the Glencore/Xstrata merger, deal value falls to $56 billion - compared to a total deal value of $149 billion in 2011.
"In 2013, expect deal activity to continue at moderate levels, well behind the frenzied pace of 2011," says John Nyholt, Canadian Mining Deals Leader, PwC. "Miners will have their eyes on opportunities, but will consider risk factors such as rising costs, resource nationalism and potential political ramifications of buying and selling assets. The appetite for controversy is decreasing as miners are wary of joining the list of highly publicized write-offs from past deals, both friendly and hostile."
Nyholt continues, "Companies want to prove more than ever that they're being prudent with shareholder dollars. There's an expectation that most deals will be smaller and more digestible, triggered by companies with successful track records from both deal and project development."
Gold and copper continue to thrive
According to the Mining Deals report, gold and copper dominated M&A activity in 2012 as miners with cash took advantage of lower valuations to fund future growth. Together, the two metals accounted for half of the top 20 deals last year, even before considering their mix in the diversified metal mergers.
"Gold and copper are both popular metals for different reasons. Investors are turning to gold as a hedge against inflation and general economic uncertainty. While copper is considered a bet on the future health of the global economy as the metal is used in everything from plumbing and power to automobiles."
Other commodities of interest include uranium as producers take advantage of prices that have been depressed since the March 2011 Fukushima nuclear facility disaster in Japan. Iron ore also appeared a few times among the top 20 deals of 2012, particularly among steelmakers looking to boost access to this metal.
Thoughts for 2013
Considerations for the mining industry for the year ahead include:
- Staying transparent - Miners are dealing with an increase in transparency initiatives for the global extractive sector. Examples include the Dodd-Frank Act's Conflict Mineral Rule in the U.S., legislation mandating project-by-project payment disclosures in the European Union that will face a vote in 2013, and Hong Kong law passed in 2010 where listed companies must disclose payments to foreign governments on a country-by-country basis.
- Growing China - China will continue to locate resources to meet its rapidly expanding economy, which is driven by its growing middle-class spending more money on consumer goods, as well as continued infrastructure spending. Also, China recently surpassed the U.S. as the world's biggest trading nation in 2012 - boding well for future commodity demand.
- Creative financing - Nyholt says, "Most miners will be looking for new ways to find and fund future growth." This includes alternative financing arrangements, including royalty and streaming agreements, which started to trend in 2012. So far in 2013, Vancouver-based Silver Wheaton announced a $1.9 billion acquisition of gold streams from Vale mines in Canada and Brazil using this method.
Nyholt concludes, "It's shaping to be another interesting year for commodity markets in 2013 as investors are waiting anxiously to see which companies have the capability to take advantage of the next big opportunity."
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SOURCE: PwC Management Services LP
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