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Small miners bulk up as global giants loom

Sarah-Jane Tasker
From: The Australian
June 23, 2011 12:00AM

GLOBAL majors are watching Australia's mining space closely, ready to pounce on the booming sector as the domestic market consolidates to create a new wave of mid-tier miners.

In the past week alone there have been two deals in the gold sector -- Catalpa Resources and Conquest Mining; and Focus Minerals and Crescent Gold -- plus Hong Kong's Wah Nam is closing in on merging Pilbara iron ore juniors Brockman Resources and FerrAus.

Ernst & Young global mining and metals leader Mike Elliot says the challenges of taking advantage of the buoyant commodity prices means miners are looking to mergers and acquisitions to get into the game quickly.

"Companies are increasingly concerned about the bottlenecking that sits around organic deals, because they are all competing for the same inputs to be able to develop the projects and there is also the threat of cost increases and timeline blowouts," he says.

Elliot says, based on data compiled by Ernst & Young, for the first five months of this year, deal values globally were up by 87 per cent compared with the same period last year.

"For year-on-year comparison, up until the end of May, globally there was $75.8 billion worth of deals done, but by number of deals, it was down 6 per cent," he says. "That reflects an increase in asset prices and that people are doing bigger deals because there is more confidence out there. So, rather than picking up single mine operations, they are multiple-mine operations that are being acquired."

Pengana Capital portfolio manager Tim Schroeders says increased investor nervousness and share price weakness has lessened the appetite for initial public offerings and equity market raisings in general, forcing miners to look to M&A as a means of securing future growth.

"The capital market constraint and the project cost blowout constraint is real and it is very difficult -- and getting more difficult in highly competitive areas -- to execute effectively," he said.

"For companies that have projects they want to develop now, if they did a scoping study 18 months ago, the capital numbers when you readjust them today are in the order of 50 per cent (higher) . . . it's not so scary for the majors, but for a single project company, it can be a very devastating blow. Merger and acquisition activity is far safer."

While the latest list of deals in Australia have been in the gold sector, the nation's top two exports, coal and iron ore, are the target of global majors wanting a slice of the sought-after pie.

NSW coalminer Whitehaven Coal put itself up for sale, but didn't find a buyer after a seven-month process, although it did flush out potential suitors for Australian coal, with Chinese interests at the top of the list. China's Yanzhou Coal and Indian conglomerate Aditya Birla Group were said to be the front-runners for Whitehaven and Peabody Energy, which had previously attempted to take over Macarthur Coal in a $3.8bn hostile bid (it also had its name thrown in the mix and is believed to still be looking at Australian assets).

"But while there are players that want to secure additional assets in Australia's coal space, it will come down to price, which is the lesson of the Whitehaven experience," Schroeders says.

"People are willing buyers, but not at any price. Undeveloped coal assets probably got to a point in the Australian market where they were being priced to perfection. The Whitehaven deal put a line in the sand and illustrated it's not a case of buying assets at any price. The markets are now recalibrating what are appropriate values in the sector."

Iron ore is also on the wish list of international buyers and Cliffs Natural Resources, which purchased iron ore miner Portman Mining for $677m in 2005, is said to be on the lookout for more Australian assets. Independent player Atlas Iron is also believed to be a target for international suitors.

Wah Nam moved on juniors Brockman Resources and FerrAus and while the investment vehicle has gained control of Brockman, with a 55 per cent interest, it is yet to secure FerrAus. But, once it does, the grand vision is to merge the two and use it as a vehicle for further consolidation in the junior iron ore space.

But with the bulk commodities being closely watched by international majors, it is the gold sector that has led domestic consolidation in Australia's mining sector.

This week, Focus Minerals made a friendly bid for Crescent Gold to create a $460m mid-tier miner. That move followed Catalpa Resources and Conquest Mining announcing a merger of equals last week, which will make Newcrest Mining the largest shareholder of the combined group, after agreeing to vend in two Queensland projects.

Baker Steel analyst David Coates says a gap opened in the gold sector following Newcrest Mining's $10bn acquisition of Lihir Gold last year.

"It's a gap that is aching to be filled," he said. "It has taken a little while, but the corporates are starting to take some steps towards selling that gap.