M&A Activity Downshifts in First Half of 2012

So far, 2012 has been a weak year for mining mergers and acquisitions (M&A). But companies that take advantage of today’s tough markets to snap up quality assets at a bargain will be well-positioned for long-term gains. That is the conclusion of PricewaterhouseCoopers’ (PwC) mid-year update on global mining deals, which was released last week.

Tight financing, lower commodity prices put the brakes on mergers and acquisitions

As the report points out, today’s situation is a far cry from where 2011 ended. Last year saw the total value of all worldwide deals jump 43 percent from 2010, to $162.4 billion. As well, 2011 ushered in the rise of “mega deals” — or transactions worth more than $1 billion. These purchases accounted for two-thirds of all transactions last year.

Six months later, the picture has changed dramatically. According to PwC’s latest report, the number of mergers and acquisitions dropped 30 percent in the first six months of 2012, to 940 from 1,371 in January through June of 2011.

PwC also reported that the total value of all deals was $79 billion, up from $71 billion a year ago. However, Glencore International’s (LSE:GLEN) takeover offer for Xstrata (LSE:XTA), accounted for $53.6 billion of that amount. Absenting that bid, the total falls to $25 billion, or about 32 percent of the first-half 2011 total.

There are a number of reasons for the decline in overall M&A activity, and chief among them are lower commodity prices, rising costs and a falloff in equity financing.

Changing political winds are creating further uncertainty

Political factors, too, are giving many potential acquirers pause. For example, rising resource nationalism has led to a number of high-profile expropriations so far this year. In April, the Argentine government seized Repsol’s (OTC Pink:REPYY) majority interest in YPF, the country’s largest oil producer. Then in June, Bolivian president Evo Morales nationalized Glencore’s Colquiri tin mine, and a month later took over South American Silver’s (TSX:SAC) Malku Khota mine, which contains rich deposits of silver and indium.

And last month, Chalco, China’s largest aluminum producer, dropped its $926-million bid for a majority stake in SouthGobi Resources (TSX:SGQ), a joint venture that is developing the Oyu Tolgoi copper–gold mine in Mongolia. Chalco backed out after the country decided to require all takeover bids worth more than $75 million, or 49 percent of a company, to be scrutinized by a government panel.

As well, some miners are holding off on further investments until after the November 6 US presidential election, which should help clarify that country’s regulatory and taxation framework for at least the next four years.

Gold shows strength — and more deals could be on the way

One bright spot is gold, which led all other metals in M&A activity during the period, accounting for 26 percent of deal value and 29 percent of volume. These figures also exclude the Glencore/Xstrata deal, which dramatically skews the results toward diversified metals.

There are signs that gold’s M&A string could continue, as juniors’ low share prices tempt majors with cash to pull the trigger. “The development-company valuations have come down to where, at least on paper, it looks like there’s some opportunities,” said Chuck Jeannes, CEO of Goldcorp (NYSE:GG,TSX:G), in a September Bloomberg article. “There’s a lot of looking going on.”

Last week saw two significant moves on the gold M&A front:

• On October 15, Prodigy Gold (TSXV:PDG) agreed to a $341-million friendly takeover offer from Argonaut Gold (TSX:AR). Under the deal, Prodigy shareholders will receive 0.1042 of an Argonaut share and C$0.00001 in cash for each Prodigy share they hold. That will give them a 22 percent stake in the combined company. In its press release, Argonaut said that adding Prodigy gives it the potential to produce 300,000 to 500,000 ounces of gold a year. Prodigy is advancing the Magino project in Ontario, which contains an indicated resource of 6.25 million ounces.

• Avion Gold shareholders (TSX:AVR) voted 99.5 percent in favour of Endeavour Mining’s (TSX:EDV,ASX:EVR) $389-million takeover offer. Both companies have mines in West Africa. Endeavour feels the acquisition could boost its output from 300,000 ounces of gold annually to over 450,000 ounces.

Heavy Chinese investment continues

The PwC report also noted that Chinese M&A activity continued at a consistent pace in the first half. However, due to the overall pullback, the country accounted for 13 percent of all deals, up from 7 percent in the first half of 2011.

“We anticipate more mining transactions from Chinese corporations could come as the country ramps up its foreign investment targets and looks to invest in metals needed to feed its rapid pace of infrastructure building,” states the report. “While China has slowed, the world’s second-largest economy is still growing quickly, at around eight per cent, and its appetite for resources is expected to remain robust.”

China is also making its presence felt in the gold market as the country’s rising wealth increases demand for jewelry and more Chinese investors buy gold as a hedge against inflation. China is currently the world’s largest gold producer and is set to become the largest consumer, ahead of India, this year.

Right now, for example, state-owned China National Gold, the country’s biggest producer, is reportedly in talks to buy Barrick Gold’s (NYSE:ABX,TSX:ABX) 74-percent stake in African Barrick Gold (LSE:ABG) in a deal that could be worth up to $3.9 billion.

Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.