Mining sector trends: M&A activity intensifies

April 2018 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

April 2018 Issue

2017 saw continued price growth in bulk commodities in the Asia Pacific region, leading to greater confidence in the market. While total deal numbers in the region were similar to 2016, more participants in the mining sector were observed actively looking for opportunities to invest at all levels, from exploration projects and undeveloped tenements to established operations.

Highlights of 2017

Announced divestment activity by some major miners continued, concentrated in thermal and metallurgical coal, leading to more higher-value transactions than in the previous two years. In particular, Rio Tinto completed its exit from coal in New South Wales, with Yancoal acquiring Rio Tinto’s Coal and Allied assets – including a stake in the Port Waratah coal terminal at Newcastle – for $2.7bn.

Other significant coal transactions included Yancoal increasing its ownership stake in the Warkworth joint venture, which operates the Warkworth coal mine in the New South Wales Hunter Valley, through acquisition of a further 28.898 percent interest from Mitsubishi for a price of $230m, taking its ownership share to 84.5 percent. The year ended with the sale by Wesfarmers of the Curragh coal mine in Blackwater, Queensland to Coronado, part of US-based Energy and Minerals Group. Coronado will acquire the Queensland metallurgical and thermal coal mine for AU$700m, together with an ongoing royalty deal if metallurgical coal prices remain above $145 per tonne.

Continued interest in both precious and base metals was also observed, with a number of deals taking on bespoke structures. Having acquired the Batu Hijau copper mine in Indonesia from Newmont in 2016, Amman Mineral Nusa Tenggara PT acquired a 44.27 percent stake in Macmahon Holdings Limited. AMNT acquired the interest in the Australian-based civil and mining services contractor for $145m, with Macmahon receiving certain mobile mining equipment from AMNT as part of the transaction. Macmahon will become the life-of-mine contractor for the Batu Hijau mine.

In the development space, South American giant SQM acquired a 50 percent interest in the Mt Holland Lithium Project. The deal creates a 50-50 joint venture with Kidman Resources for the development of the Mt Holland Lithium Project in Western Australia for a total investment of $110m.

The state of the market

Confidence in the mining sector continued to improve in 2017. Synchronised global growth has seen an increase in demand for most major commodities. Strong bulk commodity prices from the second half of 2016 continued to rebound through 2017 and have continued into early 2018. There has been a sustained market preference for high-quality resources, making Australian reserves particularly attractive. Chinese investors, in particular, have continued to display interest in Australian resources.

In 2017, the supply side of the industry responded.

A number of mines previously on care and maintenance have been reopened, with further announced reopenings for 2018, particularly in coal and base metals.

After a number of years of limited activity, development and expansion projects have resurfaced. A number of major projects were approved in 2017 and a further number are expected to reach their final investment decision in 2018. Many commentators are tipping prices, particularly gold, lithium and base metals, to peak in 2018. While prices may moderate, they are expected to remain at profitable levels sufficient to support ongoing exploration and development activity.

Against this backdrop, while the number of M&A deals completed in 2017 remained steady when compared to 2016, there were a larger number of high-value transactions, including strategic purchases by large mining houses consolidating their market position. Sales of exploration projects and small-sized operating assets in gold and base metals also continued, with a high proportion of completed deals falling in this category. Private equity has continued to remain interested in the mining sector.

Predictions for 2018

Some predictions for M&A in the Asia Pacific region in 2018 are outlined below.

Strong focus on exploration. There will be an increased focus in the mining industry on growth through exploration, select brownfield development and reopening of mothballed operations. In 2018, there will also be a larger pipeline of M&A activity as, in different forms, parties attempt to participate in higher commodity prices.

Commodities to watch. Bulk commodity prices in 2018 are expected to remain well above the low levels seen between 2014 and 2015. Continued M&A activity in both thermal and metallurgical coal over the next 12 months is expected, including completion of divestments by a major mining house. In addition, there is likely to be an increased focus on gold, copper, lithium and base metals assets.

More deals to close. Growing confidence in the sector is likely to be a catalyst for more signed and completed transactions.

Vertical activity likely to increase. There has been limited vertical activity in the sector in recent years. This may change in 2018 as manufacturers look to secure supply chains for raw materials in hot areas, such as inputs for batteries in the automotive sector.

Jay Leary is a partner and Sian Newnham is a senior associate at Herbert Smith Freehills. Mr Leary can be contacted on +61 (8) 9211 7877 or by email: jay.leary@hsf.com. Ms Newnham can be contacted on +61 (7) 3258 6591 or by email: sian.newnham@hsf.com.

Jay Leary and Sian Newnham

Herbert Smith Freehills