The value and volume of deals in the CIS or made by CIS companies is expected to rise in 2010
Moscow, 20 May 2010 — In 2009, cash was far more valuable than minerals for most of the mining and metals companies in the CIS. Large declines in the prices of and demand for ferrous and base metals, led to insufficient cash inflows generated by mining and metals companies in the CIS, placing enormous liquidity pressure on market players who were significantly over-leveraged. This is one of the main conclusions of 2009: the year of survival and revival, a study conducted by Ernst & Young.
Late in 2008, with the dawning recession in the global economy becoming real, prices in the mining and metals industry collapsed and access to credit was cut off, leading to a reduced deal activity. 2009 saw only 1,047 deals with a total value of $60b, compared with 919 deals valued at $126.9b in 2008 and 903 deals valued at $210b in 2007.
M&A activity of CIS-based companies over the year totaled just 21 transactions, with a cumulative value of US$5.9b. As a destination for mining and metals transactions, the region attracted 19 deals, with a total value of $3,8b.
A number of major metal and mining companies, which had accumulated large debts from massive acquisitions in 2005 to 2008, were forced to restructure their loan portfolios with the state-owned and Western banks, financing those acquisitions. Restructuring programs were supported by: loans from Russian state banks – VEB, Sberbank, VTB and Gazprombank; guarantees by the Government of the Russian Federation; and rearranged credit agreements of non-CIS bank consortia.
"Activity was mainly domestic or outbound due to the dampened appetite of foreign investors", says Alexei Ivanov, Ernst & Young Partner and CIS Industrial Products Leader.
M& A activity in 2009 was predominantly in precious metals, with miners taking advantage of strong gold prices.
"Gold's stability and low risk make it the most sought after commodity at 55%, with soaring prices", says Evgeni Khrustalev, Ernst & Young Partner, Head of the Mining & Metals Group in the CIS. "Coal came in at a distant second at 22%, driven by resource security and energy needs. The other commodities were marginal".
Those mining and metals companies that did not complete large acquisitions in 2005 to 2009 remained financially stable event at the peak of the crisis and continued to invest in developing and expanding their current production capacities and in fostering vertical integration.
There were 10 domestic deals valued at $2.4b, 10 outbound deals valued at $1.9b, and only one small inbound deal valued at just $1.0m.
Historically, Russian has not seen any large inbound foreign investment due to its recent nationalization policy and state rules that limit foreign investments to 25% equity interest in Russian strategic companies. Rather, foreign investors have tended to invest via joint ventures.
Top CIS mining and metals executives project capacity utilization reaching pre-crisis levels in 2011-2012. They predict the bulk of cash flows generated in 2012-2015 will be spent on interest and principal payments on the loans restructured and refinanced during the financial crisis. This will result in the following short-term and long-term trends:
а) CIS mining and metals companies with acquisitions in 2005-2009 will divest outbound business units that became low-marginal or unprofitable;
b) Russian majors will be shifting their finance raising activities to the markets of Asia and the Middle East.
According to the Development Program of Russian Mining and Metals Industry released by the Russian Ministry of Industry and Trade, the size of investments committed and proposed by the state and corporate sector for 2010-2015 accounts for more than $60b. About half of these investments are planned to be located in Russian Siberia and the Far East. These regions are home to some of the world's largest undeveloped mineral deposits of coal, copper, gold, uranium, zinc, manganese, diamonds and iron ore.
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