Mining M&A resurgence to accelerate in 2011
Thursday, 24 February 2011 — Mid sector consolidation and offshore acquisitions will be the hallmark of 2011 deal activity in the Australian mining and metals sector, as global M&A activity continues its resurgence in 2011, says EY’s Paul Murphy, Asia Pacific Mining & Metals Transaction Leader.
Commenting after the release of EY’s annual global mining and metals sector transaction report, Ungeared for growth, released today, Murphy says in 2011 there will be more deals, more diverse buyer competition and a continued appetite for projects in frontier markets in South America and Central Asia, and increasingly in Africa.
“Globally and locally, we expect merger and acquisition activity to continue to pick up,” says Murphy.
“The same factors that drove the uptick in deals in 2010 will continue to fuel the market in 2011 – resource security, higher commodity prices, improved cash flow and availability of capital, ongoing industry rationalization and the desire for greater vertical integration.”
Murphy says that in Australia, we can expect to see continued interest from emerging markets, mid-tier consolidation and a big focus on outbound activity.
“The 2010 resurgence in M&A activity in the sector occurred with restricted access to debt funding. With early indications bank lending may recover this year, this will only further accelerate the level of deals being done.”
The EY report shows that while the number of deals in 2010 was up only 7% on 2009, the total deal value rocketed up 89% to US$113.7 billion.
In Australia, from 2009 to 2010 the number of deals was up 10% to 293 (from 267) while the value of deals soared 121% to US$23.5 billion (from $10.6 billion).
Deal destination set to diversify
Where in 2009 buyer attention was focused on the perceived less risky markets of Canada and Australia, a re-evaluation of the risk-reward equation has resulted in an increased appetite for developing and frontier markets.
“Over the past six months we have seen more ‘new frontier’ markets emerge as investment destinations, with more companies venturing back into riskier regions such as West Africa and the Asia Pacific, specifically Papua New Guinea and Mongolia,” says Murphy.
“We expect this trend to continue in 2011.”
“We’ve also seen this with a number of small IPOs in Australia in recent months – almost anything with an Africa story has attracted the attention of the market.”
Resource security continues to fuel emerging market competition
Competition from emerging markets to secure raw materials continues to be the key driver of mining and metals deals. Acquisitions from developing economies accounted for 43% of total global deal value in 2010 and over half of the top 20 acquirers for the year were emerging countries.
“Resource security is driving the key acquirers – China and India, and to a lesser extent Japan and Korea.”
India, in particular, shot up the rank of acquiring countries globally from 14th place in 2009 to 7th place in 2010, accounting for 5% of global deal value.
“India’s thirst for resources to fuel its rapid economic expansion is as urgent as China’s and in 2010 the value of outbound investment from India surpassed that of China for the first time – US$4.6 billion compared to US$4.5 billion respectively.”
Mid tier consolidation
Murphy says small and mid-tier consolidation will pick up pace in 2011, particularly in the gold and coal sectors, with active capital management driving activity in an environment where debt funding will remain difficult outside the big miners.
Capital raising and financing
Backed by restored confidence, access to capital and investor appetite, 2010 saw record levels of financing, the revival of IPOs and the return of share buybacks and dividends for the sector globally.
Globally, the mining and metals sector had the highest market share of IPO and equity-related issues by volume of all industries. Total proceeds (including refinancing) raised by the sector in 2010 reached a record US$329.5 billion – 54% up on 2009 levels.
For Australia, total capital raised by the sector in 2010 was US$72.6 billion, up 213% from US$23.2 billion, with the increase largely due to BHP Billiton’s US$45 billion loan for the proposed and subsequently withdrawn offer for Potash Corp.
Australia had the highest number of IPOs globally, with 74 and fifth in value at US$1.1 billion.
Large-scale bank lending is likely to remain open only to the big diversified miners for at least the first half of 2011.
“Regardless, deals will be about more than cash. Increasingly, deals are about what else buyers can bring to the table in technical know-how and commitment to infrastructure funding and development or off take.”
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