Sept. 7 (Bloomberg) -- Global mining mergers and acquisitions, down more than 50 percent this year, are set to recover in the first quarter as metal prices surge on signs the worst recession since World War II is easing.
“You are going to get a greater number of deals being done with the existing majors and also with the mid-tier companies becoming majors themselves,” said Eric Lilford, head of Australia mining at Deloitte Corporate Finance in Perth. “By the end of first quarter of 2010, we will be looking at a stronger position overall for mergers and acquisitions.”
Metal prices have surged 68 percent this year, prompting Bank of America Merrill Lynch and Standard Bank Plc to flag more mining acquisitions. Takeovers are up almost a fifth this quarter from the previous three months after Canada’s Eldorado Gold Corp. and China’s Yanzhou Coal Mining Co. agreed to buy rivals in Australia, the biggest exporter of iron ore and coal.
“History shows that M&A deals are highly correlated with price movements,” Peter Richardson, Morgan Stanley’s chief metals economist, said by phone from Melbourne. “We would certainly expect to see an acceleration in the M&A cycle.”
Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet last month said the world economy is pulling out of its deepest recession since the 1930s. Commodity indexes will extend gains as economic recovery boosts demand for metals and other raw materials, according to Prudential Bache Asset Management Inc.
Credit Crisis
The value of mergers and acquisitions in the mining, metals, coal, iron ore and steel sectors, have declined since $187 billion worth of deals were completed in 2007, according to data compiled by Bloomberg, as metals prices almost halved last year and the credit crisis curbed funding. There have been about $19 billion of proposed and completed M&A deals this quarter, compared with $16 billion in the second quarter.
“We’ve seen a pickup in the number of buyers” for assets, said Michael Elliott, Sydney-based global mining and metals sector leader for Ernst & Young LLP. “The competition for these assets is increasing as more people feel confident and have the capacity to go and do these sort of transactions.”
Copper and coking coal producers are possible candidates for takeovers, according to Morgan Stanley’s Richardson. Rio Tinto Group and Hancock Prospecting Pty. may sell stakes in thermal coal mines to state-owned Coal India Ltd., the Australian newspaper reported Sept. 4.
Deloitte’s Lilford favors suppliers of manganese and vanadium, both used in steelmaking, as well as gold producers. Vancouver-based Eldorado has agreed to acquire Sino Gold Mining Ltd. in an all-share bid valued at C$2 billion ($1.8 billion).
‘Cross-Hairs’
“Any mid-tier gold producer has got to have big painted red cross-hairs on their forehead,” Gavin Thomas, chief executive officer of Kingsgate Consolidated Ltd., owner of Thailand’s biggest gold mine, said. “If I was a fund manager in Canada I’d go and raise A$10 billion ($8.5 billion) and come down and hoover the bloody Australian industry up.”
A rebound in mergers and acquisitions is being hampered by little improvement in access to debt for funding deals, Ernst & Young’s Elliott and Deloitte’s Lilford said. There’s not enough evidence yet to conclude that banks will soon start lending more as credit standards eased after the implementation of government rescue measures, the Bank for International Settlements said last month.
“It is going to be some time before you see debt available like it was before,” Tim Goldsmith, global mining leader for PricewaterhouseCoopers LLP based in Melbourne, said by phone. He nominates Chinese, Indian, Russian and Brazilian companies as leading drivers of any new round of acquisitions.
“Banks are invariably longer-term thinkers and they’ve obviously had a pretty hard 12 months,” Goldsmith said. “They’re going to be wary again of giving away easy credit.”
Sovereign Fund
State-owned mining companies in China, which has a $200 billion sovereign fund, haven’t been as affected by funding constraints and may boost spending on oil and mining acquisitions by at least half this year, according to data complied by Bloomberg based on deals already announced. Yanzhou, the nation’s fourth-biggest coal mining company, has agreed to buy Australia’s Felix Resources Ltd. for about A$3.5 billion.
“There are massive opportunities in the bulk materials space,” Perth-based Aquila Resources Ltd. Chief Executive Officer Tony Poli said in an interview with Bloomberg Television. “There are many companies I think looking at M&A opportunities.”
Making Calls
Xstrata Plc, the world’s fourth-largest copper producer, proposed a 26 billion-pound ($43 billion) merger with Anglo American Plc in July. Both companies may also be targets for acquirers, said Peter Arden, a mining analyst at JPMorgan Chase & Co. affiliate Ord Minnett Ltd., said. Gold companies including Silver Lake Resources Ltd., Norton Gold Fields Ltd. and Integra Mining Ltd., may also be involved in mergers, Arden said.
The net debt of global mining companies peaked at $93.5 billion in 2007, the height of the boom, Citigroup Inc. analysts led by Craig Sainsbury, wrote in an Aug 31 report. This is forecast to drop to $66.5 billion this year and $25 billion in 2011 because of share and asset sales, dividend freezes and project cutback, the analysts said.
Rio Tinto, the world’s third-biggest mining company, completed a $15.2 billion share sale in July to slash debt. Vale SA, the world’s largest iron ore exporter, had $12.2 billion in cash at the end of the first quarter, while BHP Billiton Ltd., the world’s largest mining company, had $10.8 billion.
“People were so worried about the strength of their own balance sheet and the risks internally that they weren’t looking externally,” Alex Passmore, head of metals and mining research at Patersons Securities Ltd. in Perth, said by phone. “Now, with a bit of stability, people are starting to look externally again.”
To contact the reporter on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net.
Last Updated: September 6, 2009 19:32 EDT