London, 18 March 2008 - ‘Eat or be eaten’ is the new reality for companies in the global mining industry as mergers and acquisitions (M&A) levels reach unprecedented levels and a new era of super-consolidation begins. That is the key finding of ‘Mining Deals’, a report from PricewaterhouseCoopers reviewing deal-making in the sector. It shows a huge surge in mining company M&A:
- The volume of mining deals rose 69% from the 2006 level to 1,732 in 2007. Total transaction value was US$158.9bn, up by 18% on the previous year.
- The strong upward trend covered mining companies of all sizes. Over 90% of all deals involved transactions of US$250 million or less and the number of such deals doubled in just two years from 2005 to 2007.
- At the other end of the scale, the number of US$1bn plus deals trebled, from eight in 2005 to 25 in 2007.
- Chinese and Russian companies are making their mark with a number of key foreign acquisitions in North America and Australia. The total value of mining deals conducted by entities from these two countries rose six-fold, from just US$5.3bn in 2005 to US$32.7bn in 2007, accounting for a fifth of total mining deal value worldwide.
2008 looks set to see mining deals reach astronomical record levels as super-consolidation takes place in the market. Early in 2008, BHP Billiton announced a takeover offer for Rio Tinto with a potential deal value over the US$150bn mark that would shatter all previous records. The previous highest single deal value was Rio Tinto’s 2007 US$43bn purchase of Alcon. The era of super-consolidation is being further evidenced by rumours of a Vale bid for Xstrata in a deal that could be worth US$90bn.
The report finds little evidence of a slowdown in deal activity as a result of the credit crunch. Indeed the number of mining deals announced in the fourth quarter of 2007 was more than double the level recorded in the corresponding quarter of 2006 and the latest heavyweight moves by the biggest players has got 2008 mining deal-making off to an unprecedented start.
Tim Goldsmith, global mining leader, PricewaterhouseCoopers, said: “No company can stand aside in this ‘eat or be eaten’ environment. Everybody needs to be both on the front foot as well as looking over their shoulders. The very biggest companies are positioning themselves to achieve super-consolidated global scale. They face considerable competition from fast-growing companies emerging from India, Russia and China. The industry landscape is set to change dramatically.”
Underpinning the trend is the quest for world scale, resource acquisition and resource diversification. High commodity prices and optimism about the industry’s long-term growth and profitability, with sustained demand in Asia outstripping fluctuations in western demand, are seeing companies embarking on ambitious long-term growth strategies.
Looking ahead, economic slowdown in the US, continuing financial market uncertainty and fears of actual recession will inevitably cast a cloud of uncertainty over the period ahead. However, the report concludes that while instabilities are likely to deliver a bumpier deal-making ride, the fundamentals for M&A activity in mining remain strong. Indeed, 2008 looks set to be a landmark, if not a record, deal year for the industry.
The report includes a focus on deals in each of the key mining regions:
North America – deal-making by North American mining companies continued at a very high level in 2007, even without a repeat of the clutch of mega-mergers that had characterised 2006. Canadian companies, in particular, proved attractive to foreign buyers drawn to the advantages of investing in a politically stable environment. Alongside this, there was considerable consolidation as mid-cap North American mining companies took the opportunity to scale up with a number of mutually strategic fits with counterpart companies.
Asia Pacific including Australia - deals for Asia Pacific mining assets surged in 2007. Deal numbers were up by 72% from 368 in 2006 to 634 in 2007. Total deal value rose 216% from US$11.2bn to US$35.3bn. There was a significant increase in the number of big deals. In 2007, there were seven US$1bn plus deals for Asia Pacific mining assets and a further eight US$0.5bn plus deals. In contrast, in 2006, there had been just two deals above US$1bn and no others above US$0.5bn. Intense competition for Australian mining assets lay behind much of the deal growth, with foreign buyers attracted by the politically stable environment and the potential to fill their resource pipelines.
Russian Federation - a big increase in deals for diversified assets in the Russian Federation, combined with a step change in international expansion by Russian companies, put Russia firmly on the mining M&A world map in 2007. Total deal value for Russian Federation assets was up 16% to US$19.1bn in 2007 and Russian buyer activity rose 66% to account for US$26bn of assets, up from US$15.7bn in 2006. It was the size of the biggest deals rather than the extent of deal activity that pushed up the totals. Two deals topped the list of purchases of Russian mining assets: Rusal’s US$13.3bn acquisition of a 25% stake in Norilsk Nickel and Mechel Steel’s winning US$2.3bn bid in the privatisation auction for stakes in Russian coal mining companies Yakutugol and Elgaugol. In addition, Russia’s Norilsk Nickel’s US$5.4bn all cash purchase of Canadian nickel miner LionOre highlighted the importance of international expansion by Russian mining companies.
Africa and South America - there were big increases in deal numbers for assets in both continents – up by 81%, from 52 in 2006 to 94 in 2007, in Africa and up by 51%, from 115 to 174 in South America. Of the two regions, Africa accounted for the largest total deal value with US$13.5bn worth of deals, up by 38% from US$9.8bn in 2006. South American total deal value rose slightly from US$8.6bn in 2006 to US$8.7bn in 2007.
Notes to Editor:
A copy of ‘Mining Deals 2007’ can be downloaded from Tuesday 18 March at: www.pwc.com/miningdeals
Methodology: Mining Deals 2007 is based on published transactions from the Dealogic ‘M&A Global’ database, December 2007. Analysis encompasses announced deals, including those pending financial and legal closure and those which are completed. Deal values are the consideration value announced or reported including any assumption of debt and liabilities. Figures relate to actual stake purchased and are not multiplied up to 100%. The geographical split of the deals refers to the location of the purchased asset(s). Where this is not clearly identified or relates to multiple geographical regions, the deal region is stated based on the location of the target company. The analysis relates to the extractive mining sector and therefore excludes related sectors such as the steel industry and metals trading sectors. The sector and subsectors analysed include: precious metals (e.g. gold, silver, platinum), base metals (eg iron ore, nickel, copper, aluminium), diversified (companies with a wide range of mining activities across subsectors) and other (includes coal, uranium, mineral sands, mining services).
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