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Record M&A in the Global Mining Sector Predicted for 2012

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Most action is likely to happen with the small- and mid-cap players.

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After a strong 2011, mergers and acquisitions activity in the mining sector seemed to get off to a promising start in 2012 with the proposed merger of Glencore (GLEN.L) and XStrata (XTA.L) – but some analysts are also expecting to see more deals in the smaller-cap area this year, with nearly all juniors as potential targets.

According to PricewaterhouseCoopers global mining 2011 deals review and 2012 global outlook released last month, 2011 was the second busiest year for mining M&A activity in history, with 2,605 deals announced at a disclosed value of $149 billion. PwC notes that although the market only saw one deal above $10 billion and seven deals worth more than $5 billion, $36 billion in deals were done in the junior sphere last year.

For 2012, PwC is expecting record M&A volumes and values in the global mining sector, explaining that with more than $100 billion in cash, demand for new projects, and declining developed world reserves, miners will "seek out targets to build scale and achieve cost efficiencies."

The announcement in the first quarter of integrated commodities producer and marketer Glencore's intention to merge with XStrata, which it says would create a "major natural resources group with a combined equity market value of $90 billion," will, if approved, represent the largest mining transaction in history, eclipsing both Rio Tinto (RIO)/Alcan and Vale (VALE)/Inco, notes PwC.

Charles Gibson, director and mining sector head at Edison Investment Research in London, says the M&A "boom" in mining has been consistently anticipated for at least a decade, but it has never really lived up to expectations, although there have been some notable deals, such as Kinross (KGC)/RedBack in 2010 and Randgold (GOLD)/Moto in 2009.

"The majors have done a lot to create the environment of M&A anticipation, by cutting back their own exploration budgets and publicly saying that their strategies are to let the equity markets fund exploration and then to buy it upon success and once de-risked (albeit at a higher price)," he says.

Gibson says there will be M&A activity, but as the majors can't keep buying each other, it will have to eventually filter down to the juniors and explorers.

"It will happen quickly (that is to say a major will monitor a junior that it thinks is interesting and then, usually in the wake of a key bit of exploration data – e.g., a good drill result – the major will come in with a knockout offer for the equity of the junior that can't be refused). If possible, the majors will want to avoid creating a bidding war, so there will be few, if any, hostile or competitive situations," he says.

Some of the most exciting deals may be done in some of the least well known minerals, says Gibson, in which the scope for pricing disparities is greatest. Almost all of the majors are potential acquirers, he says, while almost all of the juniors are potential targets and midsized companies can be both acquirer and target.

Jeff Wright, a senior research analyst covering metals and mining equities at Global Hunter Securities, says he believes the M&A cycle is picking up in small- to mid-cap mining, as witnessed recently by First Majestic Silver (AG) acquiring Silvermex (SLX.TO).

"The key consideration will be a company with high quality/potential assets yet lacking capital or operational expertise to achieve or increase production. In the gold sector, Brigus Gold (BRD) or Sandspring Resources (SSP.V) fits this bill. When considering silver, I believe Silverbull Resources (SVBL) looks attractive," he says.
No positions in stocks mentioned.
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