Mining and metals deal making set to soar
Resource security continues to drive transactions Thurday, 2 September 2010 — The value and volume of deals in the global mining and metals sector is set to soar, driven by competition to secure raw materials.
Ernst & Young’s Global Mining & Metals Leader, Mike Elliott, says the volume of completed deals in the first half of 2010 is up 20% to 544 on the same period last year, while deal value is up 46% to US$40.6 billion.
“Transactions activity began to really pick up in late 2009 and has continued to gather momentum,” says Elliott.
“The pace of deal activity will continue to accelerate, with the value of pending deals at 30 June four times the value of deals done in the first half of the year and the sector showing no sign of slowing.”
Elliott says resource security is the key driver of transaction activity, with China joined by Japan, India, Singapore and South Korea as the biggest buyers.
“At the same time, we will continue to see the global diversified miners pursue bolt-on acquisitions. We also expect the significant consolidation in the North American market, which dominated the bigger value deals in the first half of 2010, to continue for another 6-12 months.
“The consolidation going on in North America is being driven by the economic environment which is providing buying opportunities for those companies with access to cash and a desire for acquisitions that offer synergies.”
While Australia was the top destination for investment in 2009, Canada took top spot in the first half of the year, combined with a significant increase in activity in Latin America.
“However, we expect to see continued diversification of deal destination, with a lot more activity in Africa and Central Asia in the next 6-12 months,” says Elliott.
“While resource security continues to be the driving force behind increased deal activity in the mining and metals sector, a number of other factors are also helping to fuel transactions – including the improved cashflow and availability of capital to do deals, ongoing industry rationalization and the desire for greater vertical integration.”
Capital raising and financing
Equity remains the preferred source of capital in the sector. While the bigger diversified global miners predominantly undertook capital raisings last year, this year the mid tiers have been more active raising capital from the market.
“We will continue to see a preference for equity raisings for a while to come because of the lack of availability of bank debt, particularly among the mid-tier companies,” says Elliott.
IPOs began to make a cautious return, with 53 IPOs in the first half of 2010 raising US$6.1 billion, up from 19 and $1.8 billion respectively for the same period last year.
While the ASX and TSX dominated by volume, Hong Kong continues to emerge as an exchange of choice in the sector, with the largest single IPO (UC Rusal’s US$2.2 billion float).
Bond volumes remained high but proceeds declined more than 30% in the first half of 2010 compared to first half 2009, due to fewer issues by the large diversified miners. China dominated issues by value, accounting for 34% of the total US$26.4 billion.
Bank debt continued to decline, with fewer loans closed in the first half compared to the same period last year. Nearly two thirds of proceeds were used to restructure or extend existing financing facilities.
“Globally there has been no recovery of bank lending into the sector, however the bank lending being made available to BHP Billiton for its potash acquisition may signal a long awaited change,” says Elliott.
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