MINING FINANCE / INVESTMENT

2011 blockbuster year in mining M&A deals - PwC

Despite a weak macro backdrop and falling commodity prices, 2011 was the second busiest year of mining M&A activity in history, says a PwC report on global mining deals.

RENO (MINEWEB) - 

2011 was a tough year for the resources markets as most base metals dropped 20% or more in value and the annual performance of precious metals, as a group (with the exception of gold) was also rather dismal.

Nevertheless, in spite of dropping equity valuations for most miners, last year was the "second busiest year of mining M&A activity in history" with total disclosed values of $149 billion, a 33% increase over 2010, says PwC's Global Mining Group.

In their report, Global Mining 2011 Deals Review & 2012 Outlook, PwC noted, "Although 2011 saw only one $10 billion + deal, overall, seven deals worth more than the US dollar equivalent of $5 billion were announced. Total values in the $5 billion+ segment registered increases of 145% and 490% over 2010 and 2009 respectively."

"Deals in the $1 billion - $5 billion segment were also impressive with 23 transactions worth $43 billion being announced. Measured by value, this represented a 14% increase over the prior year and was double the 2009."

"At the opposite end of the spectrum, the junior sphere also had a blockbuster year," the report noted. "In the <$100 million segment, 1,355 deals worth $36 billion were announced, both all-time records."

"Conversely, the mid-size deal segment between $100 million and $1 billion experienced a moderate year over year contraction in aggregate value as 25 deals worth $17 billion were announced, a decrease of 6% over 2010," PwC observed.

"Atypical of mining M&A in a volatile resource market, we observed record low deal cancellations," said the report. Only 107 mining M&A deals were cancelled in 2011, the lowest annual cancellation number since 2004.

In their analysis, PwC found buyers in the US, Australia and Canada drove the lion's share of M&A values in the mining sector last year, accounting for 53% of annual acquisition values, up from 46% in 2010. Australia remained in the top spot with 22% market share, while the Americans supplanted the Chinese to become the second most acquisitive by value, representing 17% of buy-side values.

In over 51% of global mining acquisitions in 2011, acquired projects were located in the US, Australia and Canada, which ranked highest with a 25% market share, said PwC. China and Russia round out the top five in terms of project locations acquired.

EMERGING MARKET DEALS

The PwC report quotes economist David Humphreys, who observed, "The emerging market miners have become formidable competitors for the large miners based out of developed countries. They frequently benefit from preferential access to resources on their home territories, and they are well adapted to managing the risks of operating in other emerging market countries, while the participation of the state in some of the companies gives them a level of political support that the traditional miners cannot expect."

Meanwhile, China dominates buy-side activity among its growth market counterparts. "Buyers based in China represented close to half of growth market led deal activity in 2011," PwC noted. "Overall, annual Chinese buying volumes increased 40% over the 2006 peak volumes and 300% over 2006 peak market values."

The PwC report found that among growth market buyers, Asia was the most common investment destination at 57%, followed by Africa at 16%. Sixty-four percent of Chinese led acquisitions involved mining projects in mainland China.

Ninety percent of Russian-led acquisitions involved projects in Russia while 100% of Mexican-led acquisitions involved projects in Mexico. Seventy-five percent of Brazilian-led acquisitions involved projects in Brazil.

"India was a notable exception to this trend," PwC observed. ‘Although 50% of acquisitions included an India-based project, Indian buyers extended geographic reach more broadly with acquisitions led by sourcing for raw material not locally available, and high valuations and lock-in regulations discouraging transactions."

"Other notable exceptions involved deals led by mature Chinese mining powerhouses with the wherewithal and know-how to extend geographic reach globally," PwC said. "In addition, we may see less corporate M&A emanating in South Korea, but we expect to see continuing activity in the form of off-take agreements or deals that provide capital expenditure financing."

ACTVITY BY RESOURCE

"In 2011, across almost all resource categories, miners were bold, willing to bet on the long-term fundamentals behind five key resources, rather than focus on short-term market pricing gyrations," said the report. Targets with an interest in gold, coal, copper, iron ore or niobium represented 81% of aggregate target values in 2011.

"Copper saw some of the most controversial and dramatic M&A activity of 2011," PwC observed. Overall, copper deals had an average value of $193 million, a 155% increase over 2010 and carried an average premium of 46%, "the highest of all resources."

Coal targets had the highest average deal value of all resources at $871 million as mass consolidation between seniors continued across the Americas, Australia and Russia. "Coal miners ‘stuck to what they know' and very little M&A driven by resource diversification strategies was observed," said the report.

"The average size of gold acquisitions, at $41 million, was the smallest amongst all resources," PwC said. "This was largely due to an absence of large takeover targets rather than a compression in deal valuation."

"In fact, buyers in the gold sector were willing to pay a rich average 46% premium for targets, especially those in the stable jurisdictions of Canada."

Meanwhile, the report found that geographic diversification was most prevalent in iron ore deals. The majority of iron ore transactions still occurred in Australia, Canada and China.

To read the report Global Mining 2011 Deals Review & 2012 Outlook, go to www.pwc.com/ca/MiningDeals