EDITORIAL — Investors place premium on growth in mining — Busang slows merger mania

The top brass of the major brokerage firms love them; lawyers love them; and so do accountants. Most important of all, investors love them, forgetting, as many do, that if two plus two can equal five, it also can equal three.

The focus of all this affection is the mergers and acquisitions (M&A) side of the mining industry. It is big business, with more than US$14 billion spent on M&A in the global mining industry from June 1996 through to May 1997. The number of deals has slowed somewhat, according to a recent study by Stockholm-based Raw Materials Group, but only after the Busang salting scandal.

In a recent paper entitled Merger Mania Continues, authors Magnus Ericsson and Andreas Tegen note that considerably less capital is being spent on exploration than on M&A — about one-third the dollar value, to be precise.

The authors say M&A are continuing because they are a way for companies to avoid the costly, risky and long exploration phase of a mine project. The option becomes even more attractive when projects are in remote, high-risk areas. Another reason is the premium investors place on growth in the mining industry, particularly for the major gold producers, who, on an annual basis, must replace the reserves they mine.

On the other side of the fence, the Bre-X fiasco has dampened the majors’ enthusiasm for rushing into deals with juniors. Not only are the seniors more cautious; they know full well that opportunities will become less expensive over time. Juniors are not able to raise funds for exploration as easily as they did a year ago, which means many will have to make deals with the big boys on terms they might have laughed at in 1996.

Raw Material Group also makes the point that anti-trust watchdogs from Europe are monitoring industry concentration, an example being the concern that was expressed over the high level of concentration in the platinum industry.

An interesting aspect of the study is the revelation that the world’s top mining companies are getting a run for their money from those lower down the ranks. For the first time since the top 50 companies were measured, industry concentration has increased at all levels, except the top tier, which has remained fairly constant. This means companies below the very top are becoming more similar in size, whereas those at the top are contracting.

Anglo American of South Africa is still the world’s largest mining group, measured by the value of the non-fuel minerals production it controls.

However, its share of gold production has declined from 397 tonnes in 1994 to 351 tonnes in 1995 and 339 tonnes in 1996, yet it is still, by far, the largest gold producer.

Rio Tinto is still number two on the world mining scene, while, farther down the top-10 list, some interesting changes have occurred. Asarco leapt into eighth place from 13th, Inco moved up four notches into 10th place, and Phelps Dodge moved up three points to come in seventh.

The biggest jump in the top 50 was Potash Corp. of Canada, which moved up 14 places, owing to its acquisition of Texasgulf and White Springs Agricultural Chemicals.

Whether mergers and acquisitions will remain at a high level this year remains to be seen. Caution is the order of the day, and some shareholders have realized that growth for growth’s sake can be a trap if quantity is made more important than quality. And ask any kid — two and two still makes four.