PwC Report: Mining M&A slowdown is temporary

Signs point to a slowdown in global mining mergers and acquisitions (M&A) in the second half of 2011 after a strong start to the year. Deal values and volumes have already decreased by 32% and 19% month over month in July, and a further 25% and 7%, respectively, in August, according to PwC’s new Mining Deals report available at www.pwc.com. On aggregate, deal values and volumes have declined by 49% and 25% over the last two months.

In the first half of 2011, there were 1,379 deals announced worth US$71 billion, making it the busiest half year of M&A in the mining sector’s history. On an annual basis, deal volumes and aggregate values were 24% and 2% higher than 2010, and 122% and 32% higher than 2009. Average deal values during the first half of 2011 were $104 million – 40% higher than 2010. For the remainder of 2011, however, jittery global equity markets will likely put downward pressure on most mining company valuations for the near term. 

“For the time being, politics have taken commodity markets hostage. Although a drop-off in deal-making is expected, it will not cease altogether as China’s demand for metals continues to drive long-term fundamentals in the mining M&A market,” John Nyholt, PwC’s national leader of transaction services, says.

PwC doesn’t believe this is the end of an era of unprecedented global mining M&A. Chinese demand supported by other emerging nations, is the most critical factor in formulating the commodity market and, therefore, mining M&A expectations. 

Despite record overall activity during the first half of 2011, the usual deal makers from Canada, Australia and the U.K. were quiet. PwC did observe, however, a flurry of activity led by U.S. buyers, especially in the coal sector. In the first half of 2011, U.S. entities overtook Canadian entities as the most acquisitive buyers with 31% market share by value in announced acquisitions. With 19% market share by value, Canada was bumped to second place, while typically acquisitive Australia stood at only 4%.

Steelmaking ingredients metallurgical coal, iron ore and niobium dominated deal-making activity during the first half of 2011 with over 30% of activity. Coal surpassed gold as the most targeted resource by aggregate deal value as companies sought to consolidate their resources to increase exposure to the raw material needs of the emerging markets. Mining companies are also increasing deal making outside of the mining sector. As such, complementary sectors including extractive industries like natural gas, which is required for functioning mining operations, will likely be targets for M&A. A key threat for Western buyers in closing deals, however, stems from increasing shareholder and board pressure to deploy capital into organic growth or share repurchases and dividends.

In the first half of 2011, Chinese entities announced 75 acquisitions worth US$4.7 billion excluding cancelled and withdrawn deals in a decrease of 18% over the prior year. When active, Chinese entities stayed close to home with 68% of acquisition
targets headquartered in Asia and Pacific emerging markets. Lacklustre Chinese buy-side volumes were not for lack of desire as evidenced by two notable takeover attempts of Australia’s Equinox Minerals and Whitehaven Coal that both failed on valuation grounds. 

“China walking away from two potentially iconic transactions due to valuation concerns was rather symbolic and further dispels the notion that Chinese entities operate in favour of securing supply at any price,” Nyholt says. “We witnessed many instances of Chinese entities managing for profit, not supply, through 2011. Going forward, we expect that political and economic forces within China will incite continued discipline in buy-side M&A activity.”

Caution, however, does not amount to a sharp decline in China-led M&A activity. China is expected to continue acquiring gold and other precious metals, as well as quality industrial resource assets like iron ore, metallurgical coal, fertilizer minerals and base metals. PwC also anticipates China will continue to focus on frontier markets, such as Mongolia and Africa, and further consolidate its fragmented domestic mining sector. 

“Chinese buyers have been quietly amassing minority positions in many companies and they are now going to start
exercising their influence, especially if there is an opportunistic downturn,” Nyholt says. 

In fact, PwC views Chinese ownership interests as an emerging deal hurdle for takeovers as minority shareholders exert their rights. This is a natural by-product of a decade-long trend of joint venture and minority position financing deals structured to ensure supply of key commodities for steelmakers and state-owned enterprises. 

There have been two instances of such resistance this year. In December 2009, Rio Tinto announced a US$3.8-billion takeover of Riversdale Mining. The transaction was only recently closed because steelmaker shareholders Tata Steel and CSN – together 47% of the register – were keen to retain their position to ensure security of supply from Riversdale’s Zambeze coal project. Peabody Energy is also experiencing pushback from shareholders –  China’s Citic Resources and Korea’s Posco, together 30% of the register – in its bid for Macarthur Coal.