Mining M&A Activity Soars

- June 11th, 2012

2011 was a strong year for M&A activity in the mining sector, and so far 2012 is following a similar path.

Mining Sector M&A Activity SoarsThe mining sector shopping spree looks set to continue in 2012 after a strong start picked up where a busy 2011 left off.

Last year saw the value of all worldwide deals jump 43 percent, to $162.4 billion, according to a report from research firm Ernst & Young. A big mining story was the dominance of “mega deals,” or those worth over $1 billion, which accounted for two-thirds of the total value of all transactions last year. That offset fewer deals by junior companies, many of which struggled to get the financing they needed to be more active acquirers.

Buyers kept their wallets open in the first quarter

In the first quarter of 2012, mining companies made $90 billion worth of deals, according to a recent report from KPMG. That’s up 130 percent from the fourth quarter of 2011. However, it’s important to note that the proposed merger between Glencore International (LSE:GLEN) and Xstrata (LSE:XTA) – the biggest mining industry merger ever – accounted for much of that figure.

Even so, the total number of deals also took a big jump, rising to 81 from less than 50 in the previous quarter, a 75 percent increase.

Absent the Glencore/Xstrata deal, copper led the way on the global M&A front in the first quarter, with $13 billion, or 14 percent of the total value of all transactions, involving producers of the red metal. Coal was also a major factor, accounting for 9 percent of the total. Examples include the $500 million sale of Talisman Energy‘s (TSX:TLM) coal properties in British Columbia to Xstrata Coal; and Australian copper producer OZ Minerals‘ (ASX:OZL) acquisition of a 90 percent stake in the Copaquire copper-moly project in Chile.

More deals on the way

Most analysts are calling for a continued increase in global mining M&A activity in the months ahead.

That may seem odd in light of today’s weaker resource prices, but miners are taking the long view according to a recent report from PwC that states, “[w]ith over $105 billion in cash, pent-up demand for new projects, rising production costs and declining developed world reserves, miners will seek out targets to build scale and achieve cost efficiencies.”

In addition, the developing world’s thirst for resources is expected to keep rising in the years ahead despite near-term concerns about slowdowns in China and Brazil. That’s largely thanks to continued urbanization. For example, India’s steel consumption is expected to rise 6.9 percent this year and 9.4 percent in 2013 according to the World Steel Association. That would spur demand for minerals used in steelmaking, such as molybdenum and manganese.

To meet that rising demand, miners will have to rapidly increase their reserves and production. As new mines often take years to bring into production, acquisitions present a quick, low-cost way to meet that demand.

Increased mergers and acquisitions can be helpful for junior mines, especially if they are acquired by a stronger firm that has the ability to help finance their projects to completion. These deals can also give juniors access to mining expertise that may otherwise be unavailable to them.

Here are a few examples of mergers and acquisitions involving juniors this year:

Outside actors are taking on a bigger role

As PwC also pointed out, another factor supporting an increase in M&A activity is the growing role of buyers from outside the mining industry, such as resource consumers and sovereign wealth funds seeking secure access to resources. Sovereign wealth funds are generally defined as state-owned investment vehicles that invest in a wide range of areas to advance the country’s economic interests.

According to a report from private investment firm A Capital, Chinese buyers spent $21.4 billion on foreign assets in the first quarter, more than double what they spent a year ago, with state-backed acquirers accounting for 98 percent of that total.

China’s largest single deal in the quarter was oil and gas producer Sinopec’s $4.8 billion purchase of 30 percent of Petrogal Brasil. State-owned Sinopec is China’s second-biggest oil producer.

What rising M&A activity means for resource investors

So how can investors profit from the rising tide of mergers and acquisitions? In the opinion of Canadian mining investment newsletter publisher Lawrence Roulston, a good approach is to focus on well-managed junior mines with high-quality assets that could catch the attention of a major producer.

In a recent article, Roulston wrote, “Investors must be selective. The objective should be to own companies with high quality projects that will become takeover targets. Management is critically important. Companies that have cash are in a much stronger position than companies that will have to raise cash in a bad market.”

Roulston also feels that companies that are active in politically stable areas, such as Canada, the US, and parts of Latin America, will be more attractive to buyers in the near term.

 

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

 

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