in the Mining Sector
Release date: November 12, 2010
Host: Vanessa Iarocci
Guest: John Nyholt
Running time: 17:06 minutes
In this episode of Strategy Talks, John Nyholt discusses the elements behind the recent uptick of deals within the mining sector.
Announcer: Welcome to Strategy Talks, the business podcast series by PricewaterhouseCoopers Canada. Hosted by Helen Mallovy Hicks, National Leader of PwC’s Valuations, Forensics & Disputes Practice, and Calum Semple, an Operations and Consulting Partner. This interview series, featuring new topics and guests every episode, is designed to valuable insight into some of today’s hottest issues affecting your business.
Vanessa: Hi I’m Vanessa Iarocci, a vice president with PwC‘s Deals practice and your guest host for this edition of strategies talks. Today I am joined via telephone John Nyholt, the former Canadian national leader of Transaction Services. John is Rio de Janerio on location for the 14th annual PwC’s Americas School of Mines. The School of Mines is a PwC-sponsored knowledge sharing event, that brings together mining experts and professionals from the United States, Canada and Latin America. During our call today, John and I will be talking about the M&A trends in the global mining sector. The subject of our recent report prepared for the School of Mines.
Vanessa: Hi john, we have been tracking and publishing our perspective on deal making trends in the mining sector for some time now. Although, the quite frenzied pace of deal making is quite evident this year, this has really been the case since 2005. We’ve tracked over 8,000 deals in the mining sector since then. More transactions than any other sector. What is behind this long-term goal assessment in the mining deal market?
John: Well Vanessa this is what we’re seeing is a long-term commodity cycle that started back in 2000, now of course it was sharply interrupted by a credit crisis in the middle of 2008 when the commodity prices took quite a significant sharp fall. But most of roared back in the next six to 12 months and the prices have continued to advance since that time. Really when you think about what’s driving that is our view is that this long term cycle is being driven by some very significant urbanization and industrialization in the world’s soon become the world’s largest economy, China.
Vanessa: That’s quite interesting John, so it sounds like we are in quite a unique set of circumstances today. Historically speaking, have we seen a super cycle in recent history?
John: Well, we’re always somewhat cautious about using the term super cycle because it’s just so significant but this is only the really third super cycle that we’d seen in modern history. The first super cycle was the 40 year industrialization of the US in the late 1800s. The second was the 30-year post-war reconstruction of Europe and Japan, intense industrialization of Japan that began in the mid 40s. This is indeed an unusual citing and we think that the way that crisis have grown over the last 10 years we can call this another super cycle.
Vanessa: Interesting, and the two countries you mentioned China and India: in terms of the scale and the depth of the industrialization and urbanization I would imagine that those are quite larger than the previous two super cycle we’ve seen?
John: I would say that by the order of scale of what you consider the population of the United States would have been in the late 1800s; I think it was less than 50 million people - way less than 50 million. We now have China going through a massive industrial revolution and urbanization process affecting some one point billion people with an additional billion people in India. So the scale of in this super cycle would certainly outpace anything we’d seen before.
Vanessa: You know on the topic of Asia, one of the most cited media stories in mining today is Asian buying spree of resources. And you know this is not really news, but I think what is interesting is the types of deals that Asian buyers are seeking out. Can you shed some light on what kind of Asian led transactions we are seeing in the market today?
John: Sure Vanessa, but I do want to step back that when you say there is nothing new in fact we’ve seen deals that have involved an Asian acquire more than double in the last 10 years. So in 2000, Asian acquires accounted for some 10 percent of all mining transactions. In 2010, we’re seeing that number being at 21 percent; so it more than doubled in 10 year period. So it is a significant shift as well. The types of transactions we’re seeing…we are seeing a mix, but what we’re seeing more of is a partnership type arrangements where Chinese companies will come forward and make significant investments in the equity of a mining company. But not a full take out and in exchange, for that they will get not only their equity interest of all of what they’ve acquired, but they’ve often tied that together with off take agreement so that they can achieve what they’re really after and that is a secure source of supply.
Vanessa: Fascinating. So basically what you’re saying is we’re seeing Asian acquires seeking out partnerships rather than full out acquisitions and that’s because they’re after supply. Now there has also been some talk that they’re securing resources as a hedge against U.S. dollar devaluation is that another strategic rationale for M&A in the mining sector today?
John: I think that may well be another factor that’s driving some of this activity. There’s no question that the stability of the U.S. dollar has been vitally shaken since the recession of 2008, and where the U.S. dollar ends up settling in is it to be seen I think. There are some significant fiscal and monitored false challenges that the U.S. is working through.
Vanessa: Right, right. Fascinating! Now there’s clearly no end to deal flow in the mining sector but when you look at the aggregate deal value, year-to-date we’re at 104 billion and that’s inclusive of the 40 billion dollar BHP Potash deal. So we’re not seeing aggregate deal values rise at the same pace that deal volumes are rising. Now why is that the case, are seniors shying away from mega deals?
John: Vanessa it is good for you to point out that the 104 billion year-to-date deals does include the 40 billion announced transaction in BHP Potash. Of course we know that deal’ s a long way off to coming to fruition, and who knows how that is going to sort out? But in general, we are seeing a lesser amounts of what we would call mega deals – these are deals involving deal values greater than 500 million dollars – and we’ve seen the peak of mega deals in 2007. When there were some 54 mega deals in 2007, this year we’re tracking at about 28 – so we’re certainly seeing a decrease in the number of mega deal. I think there are two things to point out I guess one thing is that in the run up of the peak of 2007 we saw a number of transactions for very large companies.
Of course you’re in Canada we know about Falconbridge, we know about Inco, we know about Alcan. Once those companies have been acquired by the two or three major players in the global mining industry they’re off the markets. So the deals can’t be redone, typically. So that is one factor and I guess somewhat related to that is what we’re seeing is over the last 10 years we’re seeing a significant concentration of ownership in some of the more significant metals and minerals by large companies. So that we’re actually seeing more of the market controlled by a smaller number of players and again what that does tends to do is slow down mega deals.
Vanessa: Right that’s really something. So I mean there is basically less senior target in play today. So where are buyers looking?
John: Where we’re seeing an increase activity is with midsize companies in the mining space. We’re also seeing quite a pace on more junior companies as well and it stands to reason with a number of transactions going up there there’s less mega deals companies better than 500 million dollars then it stands to reason that the void will be filled by transactions of mid tier junior companies.
Vanessa: Ok so basically it sounds to me that buy side strategies is really evolving with the times. We’ve also noticed that some seniors are growing via deals in new and potentially higher risks geography and new resource areas. Perhaps you can shed some light on this trend and speak to a few recent deals in this sector that really speak to the fact M&A strategies are broader today.
John: Sure I do think though it’s worth pointing out that Vanessa I mean mining is generally a tough business and mines that have been set up in remote locations since people first started thinking about mining so that part is not that new but what we is think is somewhat different is the pace of development in these more remote locations and scale of political risk that’s involved in some of these locations as well. So we’re seeing a lot of interest in West Africa, gold production costs in West Africa is approximately half of what they’re currently running at in a more developed country like Australia and so that has interest. But yet you have some real political instability with regards to the Democratic Republic of Congo, for example, in West Africa.
Mongolia’s another country that is quite remote and companies there have been going through some real uncertainty with regards to the proposed tax regime and, government ownership regime, and so this additional uncertainty that miners are increasingly prepared to accept in order to continue of the high pace of development of new mine sites. Just to bring this back to our own geography, Canada there’s currently a Canadian publicly traded company, Baffinland, that is actively seeking to develop iron or resources on Baffin Island. When you think about remoteness of Baffin Island and the high arctic concept of mining iron ore up there and more importantly getting it to market from up there, it truly boggles the mind.
Vanessa: it really is mind boggling to think about mining in Baffin Island speaks volumes to how bullish mining companies are today about demand tomorrow. These are really fascinating times and our report details these trends that we’ve discussed and a few others in details. But before we end today why don’t you share with our audience us today the two key trends that we expect to see for the remainder of 2010.
John: Well, again first the continued high pace of activity is something that we certainly think will be an ongoing trend in the mining industry. We’re also seeing some interest of private funds, large pools of capital looking towards the mining sector. Typically, private equity firms have had a shorter term focus that will not sit with the investment in the mining space per say. But larger pools of capital, pension funds etc that have a more of a long term hold approach to investments, we think we’re going to see some more interest of those types of companies involved in the mining industry. And I think when you look at the number of significant pools of capital that have been rumoured to be perhaps interested in back stopping a competitive bid for Potash Corp.
I think that does prove a good point as well. In terms of other mining trends, Vanessa, we do expect to see a mild resurgent’s of mining deals in Australia as you know there’s been some political uncertainty in this country and some of that has been perhaps touched off by the resource for profits tax that previous government attempted to introduce there’s been a subsequent election and maybe there’s government maybe there isn’t a government today but there is a revised tax plan coming forward that with some certainty around that will likely lead to increased M&A activity.
There’s a lot of M&A activity and exploitation development activity in Australia the mining sector has really been put on hold following the introduction of the proposed super profit tax. Lastly, Vanessa we touched on it briefly previously with regards to the US dollar concerns, as you know commodity prices are largely denominated in US dollars and therefore subject to fluctuation both on changes in the underlying commodity as well as the U.S. dollar itself. Over the last two years we’ve seen a significant amount of volatility and a drop in value of the US dollars and that certainly had an impact on the commodity markets as well. With this greater volatility we do expect to see perhaps in deal making that there may be some additional structures incorporated to deal to allow for post deal adjustments to help balance out some of the short-term movements in commodity prices as the currency fluctuates. Those are the four major trends that we see going on and what continues to be a fascinating industry.
Vanessa: Thanks for taking the time out of your schedule at the School of Mines John. I really look forward to hearing about the new insights you gain on the ground through your discussion with global mining leaders and executives.
John: Well thank you Vanessa it’s a real privileged to chat with you about this. I too am looking forward to our conference being able to gather with over 300 representatives of mining companies from across the Americas as well as professionals from across our firm as well. Should be truly a fascinating event. I look forward to sharing more with you later
Vanessa: Indeed, for strategy talks this is Vanessa Iarocci and John Nyholt. To access the report discussed in today’s podcast visit the PwC Canada publication homepage or pwc.com/ca/miningdeals.
This concludes this episode of Strategy Talks. Thank you for listening. We hope you’ll join us again soon for another episode. To download or subscribe to this podcast series, or to find more information, please visit pwc.com/ca/strategytalks. The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting, tax, or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation. Copyright 2009, PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario Limited Liability Partnership, or, as the context requires, the PricewaterhouseCoopers global network, or other member firms of the network, each of which is a separate and independent legal entity.
Announcer: This concludes this episode of strategy talks. Thank you for listening. We hope you will join us again soon for another episode. To download or to subscribe to this podcast series, or to find more information, please visit pwc.com/ca/strategytalks. The information in this podcast is provided with the understanding that the authors and publishers are not here and engaged in rendering legal accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation. Copyright 2009 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario Limited liability partnership or as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each is which a separate and independent legal entity.