FACTS ‘N’ FIGURES — The money’s in the mergers

More than US$18 billion was spent on mergers and acquisitions in the mining and metals processing industries in 1997. This represents a 50% increase over 1996, when only US$12 billion was spent. In 1995, US$16.5 billion was spent.

The first four months of this year saw the upward trend continue, with deals worth more than US$15 billion. The increase becomes even more significant in light of the decline in exploration expenditures in 1997.

There are a number of reasons for this continued frenzy:

* Low metal prices and concomitant low share values make it relatively cheap to buy operating companies and mines;

* The economic downturn in the industry in general further necessitates restructuring to restore profitability;

* The political and economic changes in South Africa are finally affecting the structure of the mining industry in its foundations;

* Privatizations continue, albeit at a lower level than earlier; and * Exploration, the alternative to mergers and acquisitions, was partially discredited by the Busang scam.

There was an apparent downturn in mergers and acquisitions in 1996. This can perhaps be attributed to the largest deal concluded in the mining industry so far, the merger of RTZ and CRA in 1995, which inflated the figure for that year by about US$4 billion. Without that deal, the level would have been almost unchanged from 1995 to 1996.

Between 1995 and April 1998, the value of mergers and acquisitions in the gold sector was roughly US$20 billion, about one-third the total of US$60-70 billion spent during the period. Gold mergers and acquisitions are followed by those in the aluminum-bauxite and lead-zinc and nickel sectors, each of which has attracted US$6-7 billion since 1995.

The aluminum industry went on a shopping spree in early 1998, with almost US$5 billion spent during the first four months of the year. The expectation for growth in this sector after two difficult years lies behind these takeovers.

There was considerable interest in base metals in 1997, with more than US$3 billion being spent on mergers and acquisitions in this sector. The total figure for 1995 and 1996 was about US$1 billion.

Interest in copper is fading. Although US$3.5 billion was spent in 1995, only US$1.6 billion was spent in 1997. Nickel exhibits a similar trend.

Apart from the race for Voisey’s Bay, 1996 was a quiet year. However, the QNI-Gencor deal in 1997 increased the total figure to US$1.3 billion.

Platinum accounted for US$1.5 billion in 1997 and has already reached about US$300 million in 1998.

Privatizations continue in the mining and smelting industries, albeit at a slower pace. Many of these privatization proposals are becoming more difficult to carry through, since there is a perception that the best assets available under reasonable political conditions have already been sold.

In 1996, 14 privatizations amounted to US$2.4 billion. In 1997, the total number of privatization sales in the survey increased to 20, and the total expenditure has risen to US$4.8 billion.

There have been only two privatization deals during the first four months of 1998: the Alcoa takeover of Spanish Inespal for US$410 million, and Union Miniere increasing its stake, to 98% from 56%, in the Bulgarian MDK copper smelter for US$24 million.

Several other privatization deals have not yet been completed, despite long efforts.

The Zambian privatization process has been delayed again and again.

Negotiations between the Zambian privatization agency and the so-called Kafue consortium were announced in mid-1997, only to be called off in early 1998. Noranda and Phelps Dodge have since dropped out of the consortium, leaving only Avmin of South Africa and British-owned Commonwealth Development. Another Canadian firm, Ivanhoe Capital, expressed an interest in another portion of Zambia’s state-owned mining firm, but backed out.

In Peru, the selling of government-owned deposits is becoming increasingly difficult. Some bidding rounds have been called off because of little or no interest from the international mining community. The low price of copper, as well as of metals prices in general, are cited as a factor in the failure of many privatization negotiations.

In countries such as Russia, Poland, Venezuela and Kazakstan, privatization negotiations are in question, owing to political uncertainty.

— The preceding is from the report “Who Owns Who in Mining 1998,” published by Stockholm-based Raw Materials Group.