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Global mining and metals transactions - 2011 trends 2012 outlook : M and A - deal value up but volumes stunted - EY - Global

Global mining and metals transactions – 2011 trends 2012 outlook

M&A - deal value up, but volumes stunted

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Value of deals by target region (2006–2011)

Value of deals by target region (2006–2011)

Value of deals by acquiring region (2006–2011)

Value of deals by acquiring region (2006–2011)

“Despite continuing global economic uncertainty, the value of M&A activity in the mining and metals sector during 2011 reached its highest levels since the peak of 2007, proving the importance of acquisitions to the sector’s overall growth agenda.”Lee Downham
Global Mining and Metals Transactions Leader

The financial strength of the mining and metals sector would ordinarily present an ideal environment for M&A.

However, while total deal value was up 43% on the prior year to $162.4b, volumes were down 10% to 1,008, highlighting the difficulty in evaluating, financing and executing deals at the junior end of the market.

Value and volume of deals by size (2000–2011)

During 2011, strategic M&A dominated in the mining and metals sector where the urge to drive down operational costs and achieve growth simultaneously remained the focus of many mining and metals executives. Sensible, lower risk transacting was top of the agenda. This gave rise to an increase in large scale domestic consolidations, offering the promise of synergies and conducted in a familiar environment.

These deals provided a low risk way of achieving growth and leveraging existing knowledge of the market. Consolidation occurred primarily among large North American coal companies, striving to achieve economies of scale to improve their global competitive position.

Another key trend in 2011 was the intensified fight to acquire scarce low cost, long life deposits. We are also seeing majors acquiring or making strategic investments in junior exploration companies in order to manage their pipeline of resources.

M&A dominated by developed mining countries

In value terms, the M&A completed during 2011 was dominated by developed mining countries, such as the US, Canada and Australia. In addition, emerging and frontier mining regions are continuing to gain importance and provide a wealth of opportunities, particularly across Africa, South America and Asia.

For some, particularly Chinese mining and metals companies, investment in these regions is taking the form of off-take agreements or minority stakes in ASX- or TSX-listed companies with assets in these regions. For others, such as a number of aspiring India-based mining and metals companies, it is taking the form of outright M&A to sustain growth and become global players in their own right.

A clear confidence in coal

In deal value terms, coal took the lead as the most targeted commodity during 2011, accounting for over $41.4b, an increase from $17.9b in 2010. This activity was primarily driven by the large coal producers looking to boost production capacity, together with vertical integration undertaken by large power and utilities companies and steel companies to lock in the supply of raw material and manage volatility. This clearly demonstrates confidence in coal over the life of existing mines, despite the rising tide of climate change policies and regulation.

Value of deals by targeted commodity (2011)

Value of deals by targeted commodity (2011)

Gold most targeted commodity

In volume terms, gold was the most targeted commodity with 385 deals completed during 2011. While the main driver of this was consolidation between mid-tier mining companies and junior explorers to boost production and resources, there were six mega deals targeting gold completed during 2011 which consolidated some of the world’s major gold companies.

Volume of deals by targeted commodity (2011)

Value of deals by targeted commodity (2011)

The majors’ M&A activity focused on opportunistic acquisitions, rounding out minority holdings and divesting non-core or higher cost businesses, as well as, returning cash to shareholders. We did not witness any $10b plus deals during 2011, despite the capacity to transact. This was because management was understandably uncomfortable executing transformational deals that would place balance sheets under financial pressure.

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