By Karan Kumar – Exclusive to Resource Investing News
Nearly one in three mining companies is looking to expand through mergers and acquisitions in the next 12 to 24 months, primarily to gain control of raw materials, according to a study released in February by KPMG. The survey, published on February 14, came days after Glencore International Plc (LSE:GLEN), the world’s biggest publicly traded commodities supplier, agreed to buy Xstrata Plc (SE:XTA) for $62 billion in the biggest mining takeover. Bloomberg reported that the deal would create a company with 2012 sales of $209 billion and prompt speculation of further mining takeovers as the merged company challenges BHP Billiton Ltd. (NYSE:BHP) and Rio Tinto Group (LSE:RIO).
KPMG’s study, based on a survey done in June 2011 by the Economist Intelligence Unit, was based on the responses of 47 metal-industry executives. The participants represented firms with more than $1 billion in annual revenue, with two out of five executives representing firms with more than $10 billion in annual sales.
“Global metals companies have adapted defensive strategies to guard against price volatility and will continue to move towards a more self-sufficient business model,” Eric Damotte, KPMG’s global head of metals, said in the report. “Interestingly, in this move towards self-supplying, some players have looked to acquire a significant presence within the mining industry, and in some cases are now considering selling their excess raw assets on the open market. “
Closer to Suppliers, Customers
The study found that the biggest concern for the metals industry is how to manage input costs of raw materials. Fifty-one percent of those surveyed saw price volatility for key input costs as one of the biggest challenges over the next two years. The survey also found that more than half (53 percent) of the respondents want to locate assets closer to suppliers or customers.
As observers wonder whether a successful deal by Glencore and Xstrata could trigger a new wave of mergers and acquisitions in the industry, some say that mining sector is poised for consolidation in 2012. Lee Downham, transaction leader of Ernst & Young’s global mining and metals sector, said in February: “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.”
A report by Ernst & Young showed that in the mining sector, total global deal value rose 43 percent to $162.4 billion last year, with megadeals of $1-billion or more accounting for two-thirds of total deal value. Gold and coal were the dominant commodities.
The KPMG report pointed out that “upstream acquisitions are one means of gaining control over input costs or securing access to important raw materials. For integrated steelmakers, this can mean acquiring iron ore or coking coal assets to feed blast furnaces.”
Gold, Coal, top M&A list
While coal and gold still seem to top the list of consolidation in the mining industry, experts say that junior miners are also poised for M&A activity in 2012. “M&A potential driven by balance sheet strength of the major mining companies are positive underlying factors supporting the junior mining sector,” Canaccord Capital said in a recent report.
Intense consolidation is expected in the gold sector at least in 2012, according to an article by seekingalpha. The article reported that the majors in the gold industry are generating high profit margins leading to higher cash flows. “When older mines start to dry out, these companies will need to find fresher ones. With large injections of cash and relatively low valuations on mining companies, the easiest way may be to buy up a smaller operation. Keep an eye on mid-sized and junior mining companies with strong newer projects that may be attractive to the bigger mining companies.”
Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.