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M&A and capital raising in the mining and metals sector, 1H 2011 - Mining and metals M&A activity and outlook - EY - Global

M&A and capital raising in the mining and metals sector, 1H 2011

Mining and metals M&A activity
and outlook

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Transformational deals may not return this year, although we expect some to complete in 2012 as management pursue alternatives to organic growth.

Summary: Low gearing, strong earnings and good capital availability are creating an ideal environment for M&A. As a result, momentum is growing, with US$33.8b of deals completed in June.

In 1H 2011 mining & metals companies completed 19 megadeals (>US$1 billion), twice as many as 1H 2010. The average deal value has more than doubled year-on-year — a result of commodity prices driving higher valuations and a shift towards larger transactions as capital becomes less constrained.

However, macro-economic issues, rising resource nationalism, and an uncertain pricing environment have increased volatility and risk for M&A. These factors are making decisions difficult and as a result the volume of deals is actually down on 2010.

Strategic and ‘one chance’ deals are being undertaken whilst more speculative deals are being deferred. Greater time is being taken to complete deals due to higher market uncertainty and greater political complexity.

In 1H 2011 we have seen:

  • US$17.1b share buy-backs (the majority of which was from Minera Frisco SAB de CV, BHP Billiton and ArcelorMittal), with an additional US$3b buyback still pending from Vale.
  • North America takes the lead as most active acquiring region, and also the preferred destination, attracting US$39b, or 40% of activity in 1H 2011. Two large deals contributed to this: Alpha Natural Resources takeover of Massey Energy for US$7.2b and Cliffs Natural Resources Inc acquired Consolidated Thompson Iron Mines Ltd for US$4.1b.
  • Europe-based companies returning to the deal table, completing almost a fifth of deals in 1H (US$17b).

Number and value of deals


2009 2010 Change 1H
2010
1H
2011
Change
Number 1,047 1,123 7% 573 511 -11%
Value ($m) 60,035 113,706 89% 47,886 96,307 101%
Average value ($m) 57 101 77% 84 188 126%

Value of deals by target region ($b)

Value of deals by target region ($b)

Value of deals by acquiring region ($b)

Value of deals by acquiring region ($b)

Source: EY Analysis

Commodities

Over 1H 2011, coal has dominated the M&A landscape, accounting for almost 30% of deal value. There were a large number of gold deals during the first half, but they were of a relatively low average deal value (US$62m). Competition for fertilizer assets has intensified and we expect this to continue into 2H 2011.

Mining and metals M&A outlook

The announced transaction pipeline suggests the upward trend in deal values will accelerate in 2011.

As at 1 June 2011 around US$100 billion of deals had been announced in the sector.

We expect Africa to feature prominently as a focus for deal making in 2H 2011 as it remains a key destination where management believe value can be identified. We also expect China’s 12th Five Year Plan to continue to drive domestic consolidation.

Transformational deals may not return this year, although we expect some to complete in 2012 as management pursue alternatives to organic growth and shareholder cash distributions.



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