All eyes on M&A

The mining sector was thrust into the media spotlight in 2010 as the number of mining mergers and acquisitions (M&A) hit an all-time high. A new PricewaterhouseCoopers (PwC) report tracked 2,693 global mining M&A deals worth US$113 billion in 2010, bringing the decade total to more than 11,000 transactions at a value of US$785 billion.

Miners seemed to get their swagger back in 2010, and with good reason. The sector saw an impressive recovery over 2009 with announced deal volumes gaining 28% and value climbing 77% higher than the previous year.

Last year was marked by many interesting trends. Deal volumes shattered their previous record by posting a 21% gain over the peak of 2007. Yet, values remained 26% lower than the 2006 peak due to an absence of mega deals (transactions over US$10 billion).

Gold had a record-breaking year and, as a result, entities with a primary interest in gold represented 44% of total deal volume and 31% of value. Fertilizer minerals also broke through the market in 2010 as a result of the infamous failed takeover of Potash Corp. of Saskatchewan by BHP Billiton.

Many eyes continue to be on the mining sector as the world waits on what’s in store for 2011. The flurry of activity year-to-date leads us to believe we’re in for more excitement.

For a future-looking view of the coming year, PwC has outlined five expected trends for mining M&A in 2011:

Higher deal values to spur seniors into organic growth – In 2011, we expect a heightened pace of deal activity, which will put pressure on deal values. In turn, higher deal values will likely prompt more seniors to invest in organic growth.

This is because as deal targets become more expensive, the economics associated with this type of growth becomes more attractive. BHP Billiton, for example, recently announced plans for a US$80-billion investment over five years, starting this year.

We especially see this trend for companies with interests in the five key resources: gold, iron ore, coal, copper and fertilizers. Consider that, of the record US$27-billion deals announced in the first month and a half of 2011, 81% involved one of these five commodities.

China to seek spot amongst the global mining elite – While China has been an extremely active investor in global mining projects, it has yet to produce a diversified mining market leader to rival the likes of BHP Billiton or Rio Tinto.

Counter to much of the rhetoric in the market, China remains a very small player in the global mining sector. In fact, only 6% of global mining deals were Chinese in 2010, albeit the highest proportion to-date, but still dwarfed by acquirers from North America (51.8%) and Australia (16.8%). Rio Tinto and Xstrata, alone, completed more acquisitions from 2000-2010 than the combination of all Chinese buyers.

However, we believe this will change in 2011. We expect the Chinese to undertake two types of M&A activity this year that will alter the global mining landscape. The first is to take a more aggressive approach to outbound M&A in 2011. The other is to become more active on the domestic M&A front and consolidate its fragmented mining sector. 

Indian entities to undertake strategic M&A to secure supply – India’s ambitious growth plans, including its US$500-billion infrastructure build-out strategy and plans to double its coal-fired electricity generation, will boost its demand for resources, including coal, iron ore, copper and aluminum over the medium to long term.

With securing supply a chief concern, India will likely increase its deal activity in 2011.

We expect that many Indian-led deals will resemble China’s M&A activity during the 2000-2007 period, which often involved acquisitions of exploration-development stage projects structured as private placements with offtake or royalty agreements. 

Mining M&A to explore new frontiers – With limited assets in developed regions and soaring demand for resources, miners that are eager for growth will increasingly move into frontier markets. The fact that some companies have recently increased their focus on trawling the seabed for minerals is a case in point.

Frontier markets are high-risk regions with underdeveloped mining sectors. They are unlike emerging markets like certain Latin America countries, in that they have a recent history in mining and often carry significant political risk. As such, assessing the political risk before, during and after transactions is critical to M&A success in frontier regions. 

Increased stakeholder intervention to create closing hurdles – We believe the biggest change in deal processes in 2011 will stem from growing stakeholder criticism of mining M&A from non-governmental organizations (NGOs), shareholders and governments.

To expedite the deal process, acquisitive miners should proactively work with NGOs to tackle issues with local groups, address potential risks to shareholder value and work with governments that have a say in what deals get done and on what terms.

Investment Canada’s rejection of BHP Billiton’s takeover of Potash- Corp last year is a clear indication that governments around the world will be monitoring mining deals closely in 2011.

This projected outlook for mining M&A in 2011 is largely based on the assumption that China, India and other emerging world nations will consume large amounts of resources in what is referred to as the third industrial revolution.

However, current market conditions and the explosive start to the year from a M&A perspective still point to 2011 being another record-setting year for deal activity in the global mining sector.

For more information on the PwC Mining Deals report, please visit: www.pwc.com/ca/MiningDeals

– Based in Toronto, the author is a chartered accountant and a partner in the Deals group of PricewaterhouseCoopers LLP. He is the national leader of PwC’s Transactions Services group.