The year of the ‘no deal’ in mining sector says PricewaterhouseCoopers report

March 11, 2009 — Following two years of record M&A activity, 2008 has turned out to be a year of extremes, according to Mining Deals* 2008, the annual review by PricewaterhouseCoopers of mining sector M&A activity. The earlier part of the year followed the previous year’s buoyant pattern before plunging in a sudden dizzying vortex in the final months.

As well as being a year of very high deal activity, 2008 was also the year of what might have been. The potentially sector transforming bid by BHP Billiton grabbed the headlines but there were many other announced transactions that did not complete. Deal volumes plummeted 61% in the fourth quarter of 2008 towards levels last seen in 2005.

Many companies that had spent the earlier part of the year doing deals or resisting unwelcome overtures finished the year looking at overstretched balance sheets, preparing for write-downs, and welcoming back potential buyers with open arms.

The most significant surge in deal activity came in Brazil with total deal value in South America as a whole rising dramatically from US$8.7bn in 2007 to US$22.8bn in 2008. US$17.7bn of the region’s deal value was centred on Brazil – up nearly fivefold from the US$3.6bn total Brazilian mining deal value of 2007.

A large increase was also seen in deals involving Chinese buyers with the value of deals rising fourfold from US$6.7bn in 2007 to US$25.5bn in 2008. This trend is continuing and, in fact, increasing in 2009 with deals announced in February by Chinalco (a $19.5 billion transaction with Rio Tinto), China Minmetals (a $2.5 billion bid for Oz Minerals) and Hunan Valin ($0.9 billion investment in Fortescue)

Tim Goldsmith, PricewaterhouseCoopers’s mining leader, comments:

“We are witnessing a unique deal environment that will reshape much of the sector’s ownership. The rapidity of commodity and equity price falls, combined with the immense financing constraints stemming from the financial crisis, has left the sector polarised between the strong and the weak.

“Chinese investors have an unprecedented window of opportunity to get in ahead of competitors and gain access to targets that might be denied to them in normal circumstances.”

Russian Federation and Commonwealth of Independent States
The largest foreign purchase was for US$875 million by Russia’s biggest steelmaker, SeverStal OAO, for PBS Coals. The total value of deals involving assets or companies primarily located in the region rose 21%, from US$20.9bn in 2007 to US$25.2bn in 2008.

Russian Federation and CIS mining deals by sector — 2005-2008

However, the step change in international expansion that had characterised activity by Russian companies in 2007 did not follow through as strongly in 2008. Mining acquisitions by Russian companies dropped back to US$20bn in 2008 from US$26bn the previous year. Much of the total was domestic activity with no foreign acquisitions to rival the 2007 US$5.4bn purchase of Canada’s LionOre by Norilsk Nickel.

The largest foreign purchase was the US$1.5bn purchase of UK–based nickel and gold producer Oriel Resources by Russian miner and steel maker, Mechel OAO, followed by SeverStal’s US$875 million deal for Canada’s PBS Coals (see North America section on page 12). In Russia, a privatization of the Verkhnekamskoye potassium-magnesium salts deposit in the Ural region raised US$2.3bn in a sale to four Russian fertiliser manufacturing and mining companies. US$10bn of the US$20bn Russian deal total stemmed from the move to purchase a 16.66% stake in Norilsk Nickel by Interros. Holding, owned by Vladimir Potanin, already a major shareholder in Norilsk Nickel. The deal, which remains pending, is the latest stakebuilding move in the company which has also seen acquisitions by Oleg Deripaska whose Basic Element company controls aluminium producer Rusal. However, speculation about a merger between Norilsk Nickel and Rusal has not, thus far, been borne out.

John Campbell, metals and mining leader, PricewaterhouseCoopers in Russia, says:

“Looking forward the constraints and contrasts in the market will create their own impetus for deal momentum. Entities with balance sheet strength will regard the current environment as a buying opportunity although many may be content to bide their time for the right conditions to emerge.

“Access to equity and debt has dried up for many small to mid-cap mining companies. Those with portfolios that are at the development stage or that are not sufficiently revenue generating will have to sell assets to survive. The spate of impairment announcements and write downs will intensify and, across all tiers of the industry, we are likely to see considerable sector reshaping as stronger companies seize opportunities to acquire assets at low prices.”

Notes to Editor:

1. For additional information, please contact Anna Kogosova, PR Assistant Manager.
2. Methodology: Mining Deals 2008 is based on published transactions from the Dealogic ‘M&A Global’ database, December 2008. Analysis encompasses announced deals, including those pending financial and legal closure and those which are completed.
3. Download a copy of ‘Mining Deals 2008’