Mergers and acquisitions in the global mining industry

The global mining industry has seen an increase in the number of mergers and acquisitions (M&A) recently – driven by demand fundamentals that remain sound across the globe.  Deal value during the first quarter of 2012 was dominated by the long-anticipated US$53B Glencore-Xstrata merger proposal, which if successful, would represent the largest mining transaction in history.

According to KPMG’s recently published Mining M&A Quarterly Report First Quarter 2012, more than 81 mining transactions were announced during the first quarter of 2012, compared to a fewer than 50 during the previous quarter, representing an increase of 75% in volume-a strong rise even without the Glencore-Xstrata announcement.

Switzerland was both the dominant acquirer and the dominant target, capturing a 60% share of both measures by virtue of the fact that both Glencore and Xstrata are domiciled in that country. China, Chile and India combined to form about 25% of both the target and acquirer shares, while Canada played a minor role as both a buyer and a target.

In late January, Rio Tinto took effective control of Ivanhoe Mines by acquiring an additional 2% interest, taking its total ownership in the Mongolian-based copper developer to 51%.

In Africa, South Africa’s Exxaro Resources announced its acquisition of African Iron, a DRC-based iron ore developer. The deal will boost the South African miner’s exposure to iron ore and offset growth restraints in South Africa where it is a major producer of coal and mineral sands.

KPMG Director: Energy and Natural Resources Ian Kramer tells African Mining that even with the ongoing financial crisis in Europe; the continued uncertainty around the US economy; and the decreasing growth rate in China (albeit still a very healthy growth rate) demand for commodities remains high and finding resources to replace current production ounces/tonnes remains a challenge. “A number of mining companies have very strong balance sheets as a result of high commodity prices generally across the range of commodities, with the exception of commodities like platinum group metals and nickel. This situation places mining companies in strong positions to secure growth through acquisitions. The appetite for growth in the industry has also substantially picked up again. Mining companies are attempting to bolster their size and balance sheet in order to protect themselves against the uncertainty posed by the uncertain current global economic environment.”

What does this mean for the industry?

Kramer says that M&A activities focusing on the consolidation of the industry has always assisted the bigger mining companies to unlock cost optimization opportunities. “Mining has become very expensive and capital intensive and in lots of cases prohibitive for smaller junior players to enter – the costs of production cannot be minimized completely since mining companies have regulatory requirements around safety and environment to adhere to as well as ever increasing cost burdens around government imposed taxes; royalties and other forms of participation in the mining operations,” explains Kramer.

He adds:  “I am of the view that consolidation will and need to continue in order to ensure the profitability of the industry.”

What of Africa?

Kramer is of the view that in Africa, M&A activities are bound to continue and increase as the race for scarce resources continue. “A resource hungry world can simply not ignore the mineral wealth in Africa. Although current mining M&A in Africa is not yet dominated by India and China, i.e. the likes of Canada and Australia still playing a big role in this space; it is my view that China will be the biggest driver of M&A activity on the continent assuming their current growth rate continues.”

The China model is also unique and different from the traditional ‘return on investment’ models applied by Western business in that they make investments in commodities in Africa from a strategic perspective rather than from a profit orientated perspective. The big Chinese investors can do so as they are supported by Government or Government owned entities.

“In Africa, there are quite a number of projects that are bound to come online within the next five years. In addition, more and more minerals are discovered; explored and developed in less traditional mining regions on the continent, for example, countries like Sudan; Chad and Eritrea are showing mineral potential. The concern is that the increasing initiatives of governments to get their shares of the spoils could hamper the M&A activities on the continent as investors will seek to invest in more investor friendly destinations,” says Kramer, adding that uncertainty around governments’ positions regarding the industry and movements to change such positions will also affect the quantum of the M&A activities.

“We have seen changes in the tax; royalty and other government arrangements in the mining space as well as proposals for change in a number of countries on the continent over the last year, notably Ghana; Guinea; Zambia; Zimbabwe; Namibia and Mozambique. Uncertainty due to the continuation of the nationalization debate remains very high in South Africa, resulting in the limitation of M&A activities in the country.”

Coal, a major driver

According to the KPMG report, Coal was a major driver of global M&A activity in the quarter, with a total of 20 transactions announced. In line with this trend, Xstrata continued its consolidation of Western Canadian coal assets.  Iron ore also continued to have a major impact on the Australian mining M&A landscape.  But in Canada, gold re-established its usual place as the key driver of mining transactions, after taking a backseat to coal and copper in recent quarters.

But there are disadvantages

Kramer is of the view that continued consolidation of the industry through M&A activities could result in the inability of smaller players to compete in the space which will hamper initiatives to allow broader parts of communities to play a role in the industry. In order to optimize costs, mining companies will continue to make their operations leaner as they get bigger. This may result in further lay-offs of parts of the workforce especially at operations which is labor intensive.

In conclusion

“Africa remains the single most important continent for mining investment, basically the last frontier, to satisfy a resource hunger global population that all want houses, cars, mobile phones; plasma TVs; iPads etc. This hunger will not be satisfied without Africa,” concludes Kramer


David Okwara

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