'Cash-rich miners seek new seams in emerging markets'
DOUGLAS HAMILTON 27 Dec 2010
* Takeovers are shifting to the emerging markets of Africa and Asia. Pic: Reuters
The frenetic pace of merger activity in the resources sector is expected to continue into next year as predatory firms flush with cash look for opportunities to expand by acquiring junior miners in the developing economies of Africa and Asia.
City analysts say deals in the resources sector are heading for one of the best years on record. Acquisition activity over the past few years has been driven by booming commodity prices on the back of increasing demand from emerging markets. With prices for metals like gold, iron ore, copper, uranium and nickel surging, mining firms have looked to take advantage of higher cash flows by ramping up production in key metals.
UK-Swiss miner Xstrata is a good example of a firm that has thrived on takeovers. It has spent $23 billion (�15bn) on acquisitions during the past couple of years, turning itself into the fifth-largest diversified mining company in the world.
Shares in BHP Billiton, Rio Tin-to, Xstrata and others have all rallied in recent days on merger news and high prices for commodities, mainly industrial metals, which are in strong demand in China.
Takeovers are shifting to the emerging markets of Africa and Asia as BHP, Rio and Xstrata look to seal cheaper deals in less-explored areas.
Global mining acquisitions have more than doubled in value this year to $142bn, according to data compiled by US business news agency Bloomberg. That is the high- est figure since 2007, when $151bn worth of deals were completed.
The growing number of mergers and takeovers has boosted advisory fees for big investment banks such as Credit Suisse, this year�s top-ranked adviser on emerging-market mining deals. Buyers paid an average 23% premium to the market price for those deals, more than twice as high as margins in Latin America, Africa and the Middle East.
BHP and Rio lead a list of possible buyers as the top eight miners are expected to generate an estimated $132bn in earnings next year, according to brokers Sanford C Bernstein & Company. Companies involved in coal, copper and gold mining are favoured, especially those with activities in Africa.
Larger-cap miners are cash-rich and looking for new revenue pipelines, said James Holt of BlackRock Investment Management (Australia). He believes companies active in Africa could figure in a number of a major deals.
Firms such as Nathaniel Rothschild�s Vallar, Xstrata and Aluminum Corporation of China are investing from Indonesia to Mauritania, and Freeport-McMoRan Copper & Gold and Ivanhoe Mines, with projects in the Democratic Republic of Congo and Mongolia, are potential takeover targets, according to Swiss bank UBS.
Rio, the world�s third-biggest miner, has offered A$3.9bn �2.5bn for Australian coking coal developer Riversdale Mining to gain strategic reserves in Mozam-bique. Riversdale management has accepted the deal but some shareholders still have to approve it.
BHP and Atlas Iron have started discussions about co-operating on iron-ore haulage and port access in Australia�s Pilbara region, while London-listed Xstrata, the fourth-biggest miner by sales, is paying A$514 million for Sphere Resources to gain three iron ore projects in West Africa.
Xstrata is paying 15 Australian cents a ton for Sphere�s iron ore, based on the takeover price and stated ore resources. That compares with the A$2.55 a ton BHP paid in its A$204m purchase of Australian explorer United Minerals in October last year.
Equinox Minerals, based in Perth, Australia, and with mines in Zambia, agreed to pay two times earnings before interest, tax, depreciation and amortisation when it offered A$1.2bn last month for Citadel Resource Group, developing Saudi Arabia�s biggest copper deposit. That compares with the 22 times Quadra Mining paid this year for FNX Mining Company�s copper and nickel mines in Canada.
Producers can pick up assets more cheaply in developing nations based on lower reserve and resource cost multiples, said Greg Fournier, head of Asia-Pacific metals and mining investment banking at Merrill Lynch.
Morgan Stanley, Credit Suisse and Merrill are the top three banks in global mining deals this year, advising on 42 transactions valued at $81bn.
Rio is actively reviewing opportunities for small to medium-sized acquisitions, chief financial officer Guy Elliot said recently. BHP chairman Jac Nasser said last month the board wanted the company to continue to look for acquisitions.
More than half of the world�s merger and acquisition deals happen in Canada, which is home to a third of the world�s miners, according to Lee Hodgkinson, head of the Canadian mining practice at KPMG.
He expects that trend to continue.
I think 2011 will be a very active period for M&A activity, he said. The financing will be available, the cash is available.
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