Miners switch M&A roles & decrease traditional takeovers so far in 2013: PwC

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TORONTO, September 5, 2013 — A loss of confidence due to write-downs, market uncertainty, and falling commodity and equity prices across the mining sector dampened M&A activity in the first half of 2013 with deal volume dropping 31% from the same period in 2012, and deal values down 74% from January –June 2013, according to PwC’s Mining Deals Report.

“Even with the industry facing a confidence crisis and large mining companies delivering little profitability, limited deals are still getting done,” says John Gravelle, Global and Canadian Mining Leader, PwC. “Traditional takeovers of entire companies are taking a back seat to joint ventures and spinoffs. Expect more of these non-traditional and creative deals to round out M&A activity during the second half of 2013.”

As well, the mining industry’s major public companies have taken on different M&A roles in recent months — switching from buyers to sellers. Rio Tinto plc’s unloading its 80% stake in the Northparkes copper mine in Australia to a Chinese buyer is an example of this, according to the deals report.

Gravelle adds, “Mining CEOs are taking a fresh look at what assets are core and plan to raise proceeds to reduce debt, improve shareholder returns and fund capital expenditures. They will need to concentrate on the projects they have and operate them with a focus on the bottom line.”

Change in mining real estate
According to the report, Russia and Kazakhstan surprisingly took the top two spots for most active M&A by geography in the first half of 2013. Russia accounted for just over a quarter of deals, followed by Kazakhstan at 19%, and the U.S. with 11%.

Russia’s dominance is due to Mikhail Prokhorov — one of Russia’s wealthiest men — selling his entire 37.8% stake in Polyus Gold International to two billionaire bidders from the same country for $3.62 billion, the report explains. Kazakhstan had the second and third largest deals, and ranked second highest on the list thanks to the $2.2 billion buyout of Eurasian Natural Resources Corp. by the three founders of the company.

Gold and copper remain attractive for M&As
“Gold and copper continue to be the most active buyers and sellers in the first half of 2013 — a trend expected to continue as depressed prices create opportunities for those who can afford to buy,” says Gravelle.

In 2012 and 2013, gold and copper accounted for nearly half of the transactions in the sector by both value and volume. For the first half of 2013, gold was the leader by value, representing 36% of transactions from January to June — compared with 26% for the first half of 2012. Copper accounted for 12% of deals by value, down from 23% a year earlier.

What else will 2013 bring?
Considerations for the mining industry for the remainder of 2013 include:

  • Juniors’ survival plan — Junior mining companies will continue to face difficulty raising money in the current environment, which is expected to result in some takeovers this year and into 2014. A sale to a larger player may be the only way for juniors to generate some shareholder value or even avoid financial collapse.
  • Chinese demand — While economic growth may not be in double digits, growth between seven and eight per cent are still strong — ensuring a stable demand for a number of resources, including copper, coal and iron ore.
  • Making room for uranium and potash — As uranium prices eventually recover and demand from countries like Japan, China and India rise, more companies anticipate increasing production through acquisitions. Potash is another sector that could see an increase in M&A activity, with the recent cartel system being dismantled after Russian potash miner Uralkali CEO Vladislav Baumgertner walked away from its marketing partnership with Belarusian Potash Corp.

Gravelle concludes, “M&As in the mining sector will remain lethargic for the rest of 2013 and into 2014. Deals that do take place in the next six to 12 months will include companies that have enough cash to seize the opportunity and as their peers unload assets that aren’t considered a fit in this new cost-conscious environment.”

For more information on the mid-year Mining Deals report, please visit PwC’s mining site at: www.pwc.com/ca/mining.

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