Facts ‘n’ figures: 2011 nearly a record year for mining M&A, says PwC

The following is an edited excerpt from PwC’s report, entitled: On the road again? Global mining 2011 Deals Review and 2012 Outlook. All figures are in U.S. dollars unless otherwise indicated. To see the full report go to www.pwc.com/ca/miningdeals.

Disregarding market gyrations, miners aggressively pressed on with plans for mergers and acquisitions (M&A) in 2011. In total 2,605 M&A deals were announced, making 2011 the second-busiest year of mining M&A activity in history.

M&A transactions valued $149 billion, which is 33% higher than the prior year and nearly double 2009’s value tally. To put this into perspective, consider that aggregate deal value in 2011 fell just 2% short of the peak value tally in 2006.

Although 2011 saw only one deal above $10 billion, seven deals worth more than the U.S. dollar equivalent of $5 billion were announced. Total values in the above-$5-billion segment registered increases of 145% and 490% over 2010 and 2009, respectively. Deals in the $1-billion to $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 tally.

At the opposite end of the spectrum, the junior sphere also had a blockbuster year. In the under-$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 6% decrease from 2010.

In spite of dropping public equity valuations for most miners, average deal value rose to $105 million, up from $70 million in the prior year. This was largely owing to a higher concentration of large transactions, rather than an expansion in multiples.

During our geographic analysis, we identified a number of differences in the buying behaviours of developed market buyers versus growth market buyers.

Growth market buyers

Although growth markets represent a small share of global M&A, growth market buyers are gaining traction. These buyers have a strong preference to acquire projects in other growth markets.

Despite the fact that growth markets are home to most of the world’s population and that these same markets are the major end users for the world’s mining resources, growth world buyers led only 17% of acquisitions by volume in the mining sector in 2011. Canadian-led M&A outpaced the entire growth world tally. By value, this same group led 24% of acquisitions. This is a tremendous increase compared to the less than 1% penetration observed at the start of the millennium and almost 50% higher than the deal value tally at the 2006 market peak. Although not yet dominant, certainly, with each passing year, growth market miners increasingly become forces to be reckoned with.

China, not surprisingly, dominates buy-side activity among its growth market counterparts. Buyers based in China represented close to half of growth market deal activity in 2011. Annual Chinese buying volumes increased 40% over the 2006 market peak volumes and 300% over 2006 peak market values. If Minmetal’s C$6.3-billion cash offer for Equinox Minerals and Yanzhou Coal’s $3.7 billion offer for Whitehaven Coal had been successful, China’s buy-side tally would have registered at $26 billion, ahead of Canada’s 2011 total of $21 billion.

Although representative of a very small portion of the global mining M&A market, buyers based in India, Indonesia, South Korea and the Philippines made notable moves in 2011. India-based buyers announced 26 acquisitions worth $1.6 billion, a 117% increase in volumes and a more than 1,300% increase in values compared to the 2006 market peak.

Indonesia-based buyers announced $1.3 billion worth of mining buys in 2011, up from negligible values at the 2006 market peak.

South Korea-based buyers announced $2.6 billion worth of buys, up from $424 million at the 2006 market peak in a 509% increase.

An interesting facet of mining M&A involving growth market buyers was that in deals where information about project location was identifiable, 91% of acquisitions involved an early stage project in another growth market. Asia was the most common investment destination at 57%, followed by Africa at 16%. Geographic clustering was even more prevalent on a country-by-country basis, with many buyers preferring projects located in their own markets. Notable examples by volume included: 64% of Chinese-led acquisitions involved projects in mainland China; 90% of Russian-led acquisitions involved projects in Russia; 100% of Mexican-led acquisitions involved projects in Mexico; and 75% of Brazilian-led acquisitions involved projects in Brazil.

India was a notable exception to this trend. 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 powerhouses with the wherewithal and know-how to extend geographic reach globally. We may see less corporate M&A emanating in South Korea, but we expect to see continuing activity in the form of offtake agreements or deals that provide capital expenditure financing.

Developed market buyers

Many developed world buyers are “playing it safe,” and not aggressively extending geographic reach. Interestingly, this geographic clustering trend was not confined to the universe of growth market buyers. We observed a similar trend amongst developed-world buyers. In the universe of Western-led deals, 72% involved acquisitions of projects in another developed-world region. Like their growth market counterparts, buyers also preferred to stay local. Notable examples included: 64% of Australian-led acquisitions involved projects in Australia; 61% of Canadian-led acquisitions involved projects in Canada; 60% of U.S.-led acquisitions involved projects in U.S.

When extending geographic reach, many developed market buyers were most comfortable transacting in Latin America. About 44% of western-led deals outside of the west involved targets in Latin America. Although not technically considered a developed market, Latin America — especially Brazil, Chile and Peru — have a well-developed mining sector and a long history of working with large Western miners.

Africa was the next most popular destination in the growth-world. Western buyers are on record as having acquired 122 projects in Africa in 2011, a small percentage of overall deals, but noteworthy considering this total was negligible only five years ago.

A long investment time frame fraught with sovereign risk and uncertainty around true economics of a project make getting a deal done in a growth market extremely challenging for many Western miners. It remains difficult to “sell” these types of transactions to boards and markets. The World Bank recently documented that so-called “privileged access,” for countries like China, has been another deterrent to Western-led deals in high-growth regions. In a recent report, author David Humphreys, the former chief economist for Rio Tinto and Norilsk Nickel, commented on growth market buyers, stating: “. . . they often had privileged access to local resources which, as already noted, were often significant and underdeveloped. This was sometimes a function of the leases they had acquired at a time wh
en they enjoyed a quasi-monopolistic position in the country, but it also reflected the practical reality that the management of these companies were generally well-connected politically and bureaucratically within the countries in which they were domiciled, understood the regulatory regime and how to operate within it and had good knowledge of local resource development opportunities.”

It is worthwhile to note that not all miners transact within the safety of the West. Many miners have aggressively moved to extend their geographic reach. These examples are so well covered in the press that it is surprising to believe they are the exception, and not the rule. The recent Barrick-Equinox and Kinross-Red Back deals are prime examples. Another notable example was the 2011 joint venture between uber-miner Rio Tinto and Chinese partner Chinalco to explore for copper in China, with plans to expand into coal and potash.