Mergers and Acquisitions

(As originally published in Canadian Mining Journal, 1 April 2012)

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By Tom Whelan, Leader, Mining and Metals, EY

By the end of 2011, the mining and metals sector had successfully ridden the storm of global economic uncertainty, emerging financially stronger and poised for growth. Balance sheets are stronger, with many companies faced with the challenging but positive decision of how best to utilize their capital — the dilemma of buy, build or return is back on many boardroom tables.

In our annual transactions report, Mergers, acquisitions and raising capital in mining and metals: Recognizing value in volatility, we break down which countries and commodities led the charge in 2011 and what’s to come this year.

Strategic mergers and acquisitions (M&A) dominated the sector in 2011 where the urge to drive down operational costs and achieve growth remained the focus of many executives. While the financial strength of the mining and metals sector would ordinarily present an ideal environment for M&A, sensible, lower risk transacting was top of the agenda.

Global deal value was up 43% over 2010 to $162.4b last year. This growth was driven in large part by 28 megadeals (>$1 billion), which accounted for two thirds of total deal value. While deal value was up, volume was down 10% to 1,008 transactions last year, highlighting not only the difficulty in evaluating, financing and executing deals at the junior end of the market, but the impact of macroeconomic issues and resource nationalism on investment decisions.

Three key trends dominated the deal landscape this year: domestic consolidation (in particular, coal), diversification (including Canada’s own Barrick’s foray into copper) and, perhaps surprisingly, almost $20b in transactions in frontier markets. In Canada, M&A activity increased 3% year-on-year to $29.9b, and the volume of deals increased to 431 from 425 in 2010.

Risk management was at the heart of a number of companies’ decisions about investment locations. Canada remained a top preferred investment destination for companies with the number of inbound investment increasing significantly during 2011. In value terms, two thirds of this investment came from the US, where ‘one chance’ strategic deal opportunities attracted US investment away from emerging mining regions.

Yet with many developed countries around the world announcing reviews in resource policy, we expect the number of deals in emerging and frontier countries that have high quality resources and friendly foreign investment rules to increase as risk appetites grow.

Over 25 countries adopted new forms resource nationalism last year alone as governments around the world continued to look to the mining and metals industry to stabilize their balance sheets through increases in taxation and royalties. The large cost burden these changes put on mining and metals companies can, however, influence or even dissuade a company from investing in a particular country. This, on top of the fact that companies are witnessing the diminishing availability of quality mineral deposits in developed mining countries, is sure to drive companies into emerging and frontier markets.

Fitter and faster companies will be best placed to maximize opportunities for growth this year. But turbulent equity markets and limited availability of bank debt won’t make transacting easy – in emerging or developed markets. Companies must look to alternative funding sources such as sovereign wealth funds, private wealth and strategic partnerships to get deals done.

Despite an unpredictable global economy ahead, mining and metals companies have an appetite for growth and are increasingly unwilling to stall their growth plans. Those who can work with volatility will be the dealmakers.

For more information visit ey.com/Mining.

Tom Whelan is a partner at EY and the National Mining and Metals Practice Leader. He is based in Vancouver.


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