JOHANNESBURG (miningweekly.com) – Healthy demand fundamentals, strong balance sheets and an appetite for growth will drive a step-up in mergers and acquisitions (M&A) in the global mining and metals sector in 2012, Ernst & Young (E&Y) global mining and metals transaction leader Lee Downham said on Monday.

Commenting on the release of E&Y’s yearly global mining and metals sector transaction report, ‘Recognizing value in volatility’, Downham said mining and metals companies were learning to live with uncertainty and were well positioned to seize opportunities.

“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 is likely that there would be a return to deal-making this year,” he said.

Downham’s comments come only days after diversified miner Xstrata confirmed that it is in negotiations with shareholder Glencore about a possible all-share merger of equals, which would create a merged company valued at around $80-billion.

E&Y’s report showed that the total global deal value in 2011 was up by 43% to $162.4-billion, when compared with $113.7-billion in 2010, with megadeals of $1-billion or more accounting for two-thirds of total deal value, primarily driven by strategic domestic consolidation where synergies could be identified.

However, while deal value was up, the global volume of deals in 2011 was down by 10% to 1 008, compared with 1 123 deals in 2010, with limited capital availability reducing the capacity of smaller players to do deals.

In deal value terms, developed mining countries, notably the US, Canada and Australia, dominated M&As in 2011 with consolidation in coal and gold being the dominant commodities. This year, further domestic consolidation is likely.

However, Downham said the headline numbers masked the trend back to emerging and frontier mining regions, particularly parts of Africa, South America and Asia, through off-take agreements or minority stakes in ASX- or TSX-listed companies with assets in these regions.

“This shift was primarily due to the diminishing availability of quality mineral deposits in developed mining countries at a reasonable price,” he said.

Meanwhile, turbulent equity markets and the limited availability of bank debt to noninvestment grade borrowers forced mining and metals companies to look to alternative funding sources in 2011, a trend that will continue in 2012. Bank loans for the year totalled $187-billion, about half of which was refinancing.

The major diversified miners and midtier companies embraced the corporate bond market in 2011, with a record $84-billion issued, up by 16% on 2010.

In 2010 corporate bonds issued by mining and metals companies were dominated by a handful of very big raisings by the larger companies retiring bank debt and extending debt tenure. In 2011, however, there were more bond issues but for relatively smaller amounts by midtier companies, highlighting that this has now become a mainstream funding source for the sector.

Downham added that equity markets remained sensitive to macroeconomic news and for many companies, market values did not appear to correlate “with the value under the ground”.

“Overall, commodity prices in 2011 were up on 2010 driving an improvement in earnings and cash positions. Many companies are faced with the challenging but favourable decision of how best to use their capital – the dilemma of buy, build or return is back on many boardroom tables,” Downham said.

Overall initial public offering (IPO) volume was down in 2011 with global equity markets weighed down by volatility and uncertainty. In total, there were 145 listings in 2011, down 18% from 177 in 2010. Total proceeds from IPOs in 2011 came in at $17.4-billion, however this dropped to $7.4-billion, or 59% below 2010 proceeds when the $10-billion Glencore London listing is excluded.

CHINA, INDIA BUY INTO SA AS MAJORS REDUCE EXPOSURE

Further, while South Africa was not alone, as resource nationalism increased in countries across Africa, E&Y noted that other southern African countries, such as Botswana, Mozambique and Namibia, were continuing to develop as attractive mining regions at the expense of South Africa.

“While many of the mining majors have looked to reduce their exposure to South Africa, often releasing assets as part of black economic-empowerment deals, we have continued to see acquisitions made by Indian and Chinese companies. This is in addition to those transactions primarily done to secure supply via off-take arrangements,” the report stated.

Gold was the most targeted commodity, accounting for 73% of the total South Africa-based M&A, off the back of strong gold prices achieved in 2011. The largest acquisition was completed at year end when the China-based Jinchuan group acquired base metals miner Metorex for $1.4-billion.

E&Y expects the nationalisation debate to continue until the African National Congress policy conference later in the year.

Last week, a leaked copy of the ruling party's study on nationalisation reportedly strongly rejected calls for mine nationalisation as being unconstitutional but comes out in favour of higher Australia-typed taxes.

E&Y also noted that uncertainties around licensing have been addressed and the December 2011 High Court ruling on the Sishen iron-ore rights is seen as positive.

“We can expect to see continued focus on rail infrastructure and power supply, following promising improvements in the last quarter of 2011. Concerns over the limitation of power will continue to detract from inbound investment during 2012,” E&Y said.

However, the analyst expected continued interest from China and India as acquirers, as well as increased consolidation between smaller domestic platinum companies where the market remains fragmented.
 

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