We expect to see uncertainty and volatility in the market throughout 2012

Coal remains the most targeted commodity in 1H 2012 in value terms at $12.4b. That’s despite a year-on-year decline in activity as lower shale gas prices weakened coal demand.

Coal acquisitions were driven by:

• Power utilities and trading companies buying assets to secure supply
• Consolidation in order to achieve synergies and economies of scale, particularly in Australia due to the inflationary cost environment
• Large players looking to boost production capacity

Copper was the second most sought-after commodity in 1H 2012, with $9.2b of deals completed.

Activity was driven by strong long term demand fundamentals and competition for scarce, quality assets.

Steel deals took the third largest share of deal value, reflecting consolidation among China’s fragmented steel sector in an effort to remove excess capacity, reduce costs and improve margins.

Gold deals took the highest share of deal volume at 160 in 1H 2012.

However, there were fewer big deals compared with the same period in 2011. That resulted in a relatively low average deal value of $40m (down from $62m during 1H 2011).

Expectations of a demand rebound in uranium is triggering acquisitions to secure future supply in the current depressed pricing environment— deal value and volume has increased year on year.

M&A outlook

We expect to see uncertainty and volatility in the market throughout 2012.

Those companies with a bullish outlook on China, and that can work with volatility,will be the dealmakers this year.

The following factors are likely to drive future deal flow:

• Lower valuations, which may drive opportunistic deal activity
• A prevailing focus on M&A in familiar territory during volatile times; this may take the form of domestic consolidation or companies seeking to build on their minority holdings and JV positions
• Synergistic, ‘one chance’ deals if valuation metrics permit
• Increasing costs of organic projects driving a greater focus on M&A by the producers

Greater scrutiny on investment returns will force management to adopt more sophisticated bid tactics and focus on synergies and unique competitive advantages.

We expect to see more divestment activity. We also expect an increased focus on portfolio management in the face of rising costs, with nearly 70% of mining and metals respondents in Ernst & Young’s Capital Confidence Barometer (April 2012) planning divestments in the next 12 months to focus on core assets.

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