Mining M&A: Asia & Gold Shine

BMI View: Mining M&A will continue to pick up over the coming quarters with the bulk of deal flows concentrating in Asia and gold. Despite China's push to secure resource investment globally, mining M&A will not stage a full return to the headier times of last decade.

We expect merger and acquisition (M&A) activity in the mining sector to pick up in 2014-2015. This will be driven by the depressed valuations of mining firms, especially junior miners, the push to enhance operational efficiency and China's continued appetite for resource investment ( see 'M&A Ahead, But No Return To Boom Times', May 09).

Additionally, miners will be forced to pursue alternative forms of financing to sustain operations given the pullback in risk capital from both the debt and equity markets. Private equity (PE), sovereign wealth funds (SWFs), royalty and streaming deals will provide this alternative and encourage more M&A deals in the coming quarters.

M&A To Pick Up
Global - Mining M&A (Volume & Deal Count)

Mining M&A: Asia & Gold Shine

BMI View: Mining M&A will continue to pick up over the coming quarters with the bulk of deal flows concentrating in Asia and gold. Despite China's push to secure resource investment globally, mining M&A will not stage a full return to the headier times of last decade.

We expect merger and acquisition (M&A) activity in the mining sector to pick up in 2014-2015. This will be driven by the depressed valuations of mining firms, especially junior miners, the push to enhance operational efficiency and China's continued appetite for resource investment ( see 'M&A Ahead, But No Return To Boom Times', May 09).

Additionally, miners will be forced to pursue alternative forms of financing to sustain operations given the pullback in risk capital from both the debt and equity markets. Private equity (PE), sovereign wealth funds (SWFs), royalty and streaming deals will provide this alternative and encourage more M&A deals in the coming quarters.

M&A To Pick Up
Global - Mining M&A (Volume & Deal Count)

Most Attractive: Asia & Gold

We believe Asia and gold will continue to dominate the bulk of mining M&A over the coming quarters. According to Bloomberg Industries, the majority of mining M&A deals in 2013 (both completed and pending) were concentrated in Asia and gold, at 45% and 16% of total value, respectively. This was followed by North America and copper, at 29% and 11% of global value, respectively.

Asia & Gold To Remain In The Limelight
Global Mining M&A - By Target Region & Target Industry (2013)

Asia: Divestment Spree To Spur M&A

Within Asia, the rich deposits of untapped minerals in Myanmar, Philippines and Vietnam, and the sale of distressed mining assets in countries including Australia should heighten M&A deal flows in the coming quarters. Major miners such as BHP Billiton and Rio Tinto are tightening their belts and focusing on the development of their core revenue streams.

Junior miners, in particular, are coming under duress from funding constraints and the slump in commodity prices. The subsequent wave of asset disposal should pave the entry of investors looking to acquire assets on the cheap. For instance, acquisitions by Chinese gold miners reached a record high of USD2.3bn in 2013 as the meltdown in gold prices slashed asset values and sidelined Western players laden with debt.

M&A To Increase With Mining Austerity
Select Companies - Bloomberg Consensus Estimates for Global Capital Expenditure (% chg y-o-y)

Americas: Canada To Remain Top Destination For M&A

We also expect the Americas will remain one of the most competitive and attractive regions for mining M&A. Canada in particular will serve as a hub for regional M&A activity on account of many of the world's top miners being headquartered in the country and its capital markets remaining as a top source for funding. We therefore expect many Canada-headquartered firms to look southward and seek attractive deals both in the US and Latin America.

Moreover, the Americas boast approximately 50% of the world's copper reserves and approximately 25% of the world's gold reserves, with many parts of Latin America still unexplored. With countries including Chile, Mexico, and Peru having established regulatory frameworks and broadly stable business environments, junior miners engaged in exploration activities in these destinations will remain ripe for takeover or joint-venture deals.

Low Valuations Will Encourage M&A
Copper & Gold Producers - Ratio Of Enterprise Value To Value Of Proven & Probable Reserves

China A Key Driving Force

China's push to secure mining assets globally will be a key force in driving global mining M&A. As exemplified by the USD5.8bn sale of Glencore Xstrata's Las Bambas copper project in April 2014, China will retain an appetite for resource investment due to the structural shortfalls in domestic production. The Las Bambas mine in Peru is one of the world's largest mines under construction, with an output capacity of 450 thousand tonnes per annum (ktpa) once it begins production in 2015.

China Still Hungry For Resource Investment
China - % Of Global Production & Consumption (2013)

Apart from a clear structural deficit in copper production, Chinese appetite for gold is playing catch-up after being repressed for years. Depleting reserves, falling ore grades and the relatively short life span of domestic mines will further encourage outward Chinese investment. Furthermore, there is an official push for Chinese miners to expand their mining footprint abroad. China's National Development and Reform Commission (NDRC) announced recently that resource deals under USD1.0bn will only require registration, not verification, with effect from May 8 2014.

East vs West: A Clear Difference

The drivers for undertaking mining M&A differ between the east and the west. For China, it is primarily fuelled by the desire to secure raw materials for domestic use. In contrast, many of the western players will embark on mining M&A to generate positive synergies through greater economies of scale and to diversify their portfolios. For instance, the merger between Barrick Gold and Newmont Mining, which has since collapsed acrimoniously, would have resulted in USD1.0bn in cost synergies from their combined gold operations in Nevada, US.

No Return To Boom Years

Despite a rise, we do not expect mining M&A to stage a return to the headier times of last decade. Austerity will remain a key focus in the mining industry and many miners will remain in capital preservation mode over 2014-2016. The nature of M&A deals should be more conservative compared to during the China-led commodities price boom of 2002-2011. Traditional takeovers of entire mining firms should take a back seat to joint ventures, spin-offs and the purchase of strategic stakes by investors.

Global - Select M&A Deals In 2013
Announce Date Target Name Acquirer Name Seller Name Announced Total Value (USDmn) Payment Type Deal Status
Sep-13 DSME SMC Ltd SUN Cement Co Ltd Daewoo Shipbuilding & Marine Engineering Co Ltd 3,584 Cash Completed
Dec-13 Ekibastuz GRES-1 LLP,Kazhydrotechenergo LLP National Welfare Fund Samruk-Kazyna JSC Kazakhmys PLC 1,300 Cash Completed
Nov-13 Ganzhou Rare Earth Mineral Industry Co Ltd Guangdong Weihua Corp Ganzhou Rare Earth Group Co Ltd 1,232 Stock Pending
Jan-13 Rocky Mountain Properties/Montana and North Dakota Denbury Resources Inc ConocoPhillips 1,050 Cash Completed
Oct-13 Rio Tinto PLC Clermont Coal Mine Sumitomo Corp,Glencore PLC Rio Tinto PLC 1,015 Cash Completed
Jan-13 Zimbabwean platinum unit Private Investor Impala Platinum Holdings Ltd 971 Cash Pending
Dec-13 Indonesia Asahan Aluminium Tbk PT Republic of Indonesia Nippon Asahan Aluminium Co Ltd 557 Undisclosed Pending
May-13 Assets of Northwest Aluminum Fabrication Branch Aluminum Corp of China Aluminum Corp of China Ltd 529 Cash Pending
Aug-13 Voskhod Mining Plant,Tikhvin Ferroalloy Plant Yildirim Holding AS Mechel 425 Cash Completed
Feb-13 Anhui Tongguan Lujiang Mining Industry Co Ltd Tongling Nonferrous Metals Group Co Ltd Tongling Nonferrous Metals Group Holdings Co Ltd 383 Cash Pending
Nov-13 Substantial assets Meizhou Weihua Copper Foil Manufacturing Co Ltd Guangdong Weihua Corp 330 Cash Pending
Jun-13 Rio Tinto Eagle Mine LLC Lundin Mining Corp Rio Tinto PLC 315 Cash Completed
Source: Bloomberg Industries, Company Announcements
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.