13 May 2012•By Susan Milligan https://business-reporter.co.uk/2012/05/if-you-want-something-doing/
Cash-rich miners are headed for a frenzy of deal making – after all, why build a company when you can buy one?
Driven by a high appetite for growth and a heavy demand from developing countries, the mining industry is in a deal-making mood, with analysts predicting further increases in mergers and acquisitions in the coming year.
The proposed Glencore-Xstrata merger is just the tip of the iceberg, analysts say.
There is always demand for metals, even in nations where growth has slowed somewhat, according to Richard Whittall, president and CEO of Newstrike Capital, a Canadian-based exploration company which is mining for gold in Mexico’s Guerrero Gold Belt. “It’s a gold rush, and in every commodity, not just gold,” he says.
Whittall: it’s a gold rush
“As developing nations build their infrastructure and require metals for manufacturing, you’ve had incredible demand around the globe. So the companies are all producing more, and they’ve got to replace the ounces – copper, iron ore, gold. They need to replenish and replace those reserves. So they’ve got to gobble up companies that have a new potential mine.”
Total global deal value in the mining sector grew by a startling 43 per cent last year, increasing from $113.7 billion (£70.6 billion) in 2010 to $162.4 billion (£101 billion) in 2011, according to a report by Ernst & Young. Deals were bigger averaging $1 billion (£0.62 billion) in size, but there were fewer of them: Total deal volume dropped by 10 per cent over the same period, as smaller miners had limited access to loan capital, the report says.
But today even the juniors – that is mining firms that have not yet started production – have more cash on their balance sheets, and all miners are struggling for positions in the developing world. Deal volume is expected to grow, as juniors try to become seniors.
The Glencore-Xstrata proposal would be the biggest mining deal in history if completed and would create a company with a market value of $90 billion (£56 billion). Glencore, the world’s largest publicly-traded commodities trader, plans to swallow up Xstrata’s coal and copper mines to produce a mega-company which the two firms say would have sales of $209 billion (£130 billion) this year.
“The global uncertainty and volatility is likely to continue through 2012, but mining and metals companies have an appetite for growth and are increasingly unwilling to stall their growth plans, so it’s likely there will be a return to deal-making in 2012,” Ernst & Young’s global mining and metals transaction leader Lee Downham says in the annual mining report, Recognizing Value in Volatility.
“Those who can work with volatility will be the deal makers in 2012 and there may well be real buying opportunities,” he predicts.
The mining industry is naturally attracted to mergers and acquisitions, since companies must constantly look for new sources of gold, copper, iron ore and other resources to remain profitable, analysts say.
Acquiring companies down the food chain – as Glencore plans to do with a willing Xstrata – satisfies the never-ending need to find and excavate metals and minerals, says Bruno del Ama, co-founder and CEO of Global X Funds, a New York-based provider of exchange-traded funds that facilitates access to investment opportunities across the global markets. “It’s cheaper to buy a competitor than to set up a whole new mine,” del Ama adds.
Having weathered the storm of the global economic downturn, mining industry companies found themselves with healthy balance sheets by the second half of last year. Commodities prices went up from 2010 to 2011,
the Ernst & Young report notes, providing a source of funding for majors in the field.
“Many companies are faced with the challenging but favourable decision of how best to utilise their capital,” Downham concludes. “The dilemma of buy, build or return is back on many boardroom tables.”
In south-east Asia in particular, the demand for non-precious metals such as iron ore and cooper is non-negotiable, Newstrike Capital’s Whittall says: “If you’re growing at nine per cent of GDP, you need steel, and you have to get it from somewhere.”
Acquisition activity: industry bullish about closing deals
Demand for gold is also burgeoning, supported by high demand for gold by consumers in India and China, as well as by investors seeking a store of value; this makes even junior miners, which are usually regarded as risky investments because of the likelihood of making a strike, into attractive targets. And there are many smaller gold mining companies that could be up for grabs.
Some manufacturers are eager to assure the supply of certain, sometimes rare, metals for their products, according to Paul Martyn, global VP of supply strategy at BravoSolution, which makes junior mines with assured resources into very appealing acquisitions. The electronics industry has been eyeing Africa, he says.
“A lot of our hand-held telephones, iPads and laptops require some very rare metals. So there’s a scramble among electronics manufacturers to acquire the mining companies,’’ Martyn adds. “They’re trying to guarantee the limited supply so they can rob the early supply.’’
Mining funds will benefit greatly from this trend, as their holdings are expected to appreciate in value with bids expected. But, at the time of writing, everyone is watching to see the outcome of the Glencore-Xstrata merger. Should it fail, the mergers and acquisitions boost could also falter, at least for the near future.