As mining deals get bigger and the pace of consolidation accelerates, the emerging trend might best be described as “victim or vulture,” says London-based analyst Jack Jones of CIBC World Markets.
“This year’s mega-deals look set to top the high activity levels of the past four years,” Jones notes while commenting on the recent deal struck between London-based
Jones expects more deals from BHP Billiton, which will have about 6 billion shares outstanding and a market capitalization of US$28 billion. “A key rationale behind BHP Billiton was the creation of a stronger player able to participate in the continued consolidation of the global mining industry. This is not our interpretation; this was explicitly stated. CEO-designate Brian Gilbertson is a consummate deal-maker.”
Indeed, the ink was barely dry on the BHP Billiton agreement when BHP announced an all-cash bid for
BHP isn’t the only company making deals on the diamond front.
As Jones sees it, these and other current mega-deals are based on three recent phases of corporate activity:
the major South African mining groups have restructured and moved to London;
the North American copper and aluminum industries have consolidated;
and over the past year, London mining groups have undertaken a US$12-billion acquisition spree.
As for the future structure of the mining industry, Jones believes that a small number of global majors will own the world’s key deposits. “On a much smaller scale, nimble and entrepreneurial juniors will survive. In between these two extremes, nothing. This also reinforces our expectation of more deals.”
Now that BHP Billiton and Anglo American are busy digesting recent acquisitions, Jones sees a window of opportunity for unencumbered “vultures,” especially
Looking ahead over the next year, Jones expects a replay of 2000 activity, albeit with increasing potential for contested situations to develop. “However, we would be surprised to see an indiscriminate frenzy from the London majors,” he writes. “Rio Tinto has recently signalled no change to its rigorous evaluation criteria; Billiton, too, has acquisition discipline; and Anglo American has moved in this direction in the last year.
“We see more risk of value destroying acquisitions from those mining groups that are driven to seek the protection of greater critical mass,” Jones concludes. “However, with the well-financed global giants circling, any share price weakness from market worries on strategic direction or valuations may see a potential vulture rapidly becoming just another victim!”
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