“If it was the financial services sector that led us into the global financial crisis, then it is the mining and metals sector that is leading us out of it.”Michael Lynch-Bell, Global Mining & Metals Transactions Leader, Ernst & Young
In many countries, the mining and metals sector led the economy into recovery, as commodity prices soared on the back of buoyant demand from emerging markets. The year ended very strongly, with the industry poised for strong growth in 2011.
The recovery was uneven because of the uncertainty around resource taxation and economic concerns in Europe and the US. The lower-geared majors largely relied on organic growth to rebuild shareholder value rather than transact.
Few companies were comfortable with transformational deals, leading to a preference for strategic bolt-on deals to diversify geographic and product portfolios. Record bond proceeds were raised due to low interest rates.
But the strength of recovery varied greatly from region to region:
- Across Asia-Pacific, deal value surged on 2009 levels, targeting gold, coal and steel
- In North America, companies reactivated in a round of market consolidation
- In Latin America, the emerging markets made the most of their early economic rebound
- In Africa, deals grew 407% as companies from every region in the world turned to the continent in a bid to secure future supply, with West Africa shaping up as one of the next supply hot spots
With competition for quality assets increasing, Asian investors and major metals producers began targeting juniors. Chinese and Indian investors in particular sought deals that required funding at an early stage in the development.
India is emerging as a large global player and will play catch-up to China over the medium term driven by the enormous size and upward mobility of its population and the resultant demand.
Recapitalization and excess capital from stronger prices, in some instances, created a “grow” or “give back” decision for management teams. For those that chose to grow, there was a propensity to take on greater political risk.
As a result, more companies ventured back into riskier regions, such as West Africa, South America and Asia-Pacific, specifically Papua New Guinea and Mongolia. Deal activity was often driven by the need for partners to help fund the infrastructure to support these projects. This expansion into emerging and frontier markets also created a greater focus on sovereign risk.
In this report, we take a close look at the major industry trends from 2010, and a look ahead at what to expect in the future across the following areas: