Outlook poor as mining M&A slumps

November 2013 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The mining industry suffered a fairly poor start to 2013 with both deal volume and value falling compared with the same period in 2012. Volatility in the mining sector had a significant impact on the industry during H1 2013, according to a recent report from PwC.

In ‘Deals in the dumps: Global Mining Deal Mid Year Report’, PwC notes that while the mining industry is a cyclical business, a number of factors have led the sector to suffer for much of 2013. Most notably the mining industry has seen falling commodity and equity prices and a number of multi-billion dollar write-downs in 2013, negatively affecting confidence across the industry. “There’s been a confidence crisis with big mining companies because they haven’t been able to deliver the levels of profitability shareholders have grown used to in recent years, even after the global financial crisis,” says John Gravelle, PwC’s global leader. “The substantial write offs we’ve seen from many big producers around the world have caused investors to leave the market and move on to other things.”

To that end, the nervousness surrounding the mining sector took a large toll on the M&A market in H1. Throughout the first six months of the year, the number of deals announced decreased by 31 percent compared with the same period in 2012. According to PwC’s data there were just 649 mining sector deals in the first half of 2013, while the first six months of 2012 saw a total of 940 transactions. Furthermore, the three largest deals of H1 saw the sale of just stakes in companies, rather than majority takeovers.

Deal value also fell by 70 percent to $22.9bn between January and June of 2013, although the figures for 2012 were skewed somewhat by the $54bn acquisition of Xstrata Plc by Glencore International Plc. The deal for Xstrata was the largest ever takeover in the mining sector, but even if that deal is factored out of the equation, deal values for H1 2013 were still down 21 percent year on year.

As both deal values and volume fell in the first half of the year, the location of deals has also changed dramatically compared with H1 2012. The top M&A activity so far this year has come from Russia, Kazakhstan and the United States, deposing Australia, Canada and the UK. In H1 2013 Russia accounted for around a quarter of all deal value by geography.

Volume and value

The first half of 2013 saw a 31 percent decline in the number of M&A deals compared with the same period in 2012. However, both of these two periods were considerably quieter than the first half of 2011. In H1 2011 there were 1371 transactions, making it one of the busiest half years in the history of the mining industry.

Deal volume, thanks in large part to the massive $54bn Glencore deal of 2012, was also down 70 percent year on year in H1 2013. Yet even without the Glencore acquisition, average deal values for H1 2013 were still 21 percent lower than last year. Russian businessmen Zelimkhan Mutsoyev and Gavril Yushvaev completed the largest deal of the year thus far when they acquired a 37.8 percent share in Polyus Gold International, Russia’s largest gold miner, for $3.62bn. The Republic of Kazakhstan and three Kazak billionaires, who were founding shareholders of the Eurasian Natural Resource Corporation, paid $4.6bn for a 26 percent share in the company. The National Welfare Fund Samruk-Kazyna also purchased a 29 percent stake in Kazzinc from Verny Capital for $1.65bn. Average deal value for the half year period in 2013 was $52.2m, which was slightly higher than the average price of $47m seen in H1 2012, excluding the Glencore deal.

Lower commodity prices were a key driver of the deals that actually did take place during the first half of the year. Those companies that could afford to complete acquisitions were able to carefully consider any approaches they made for assets. In terms of gold and copper, H1 2013 was very similar to the same period in 2012. In both years gold and copper accounted for nearly half of all transactions in the sector by both volume and value. In 2013 gold was the leader by value; transactions for gold accounted for 32 percent of all deals, up from 26 percent in 2012. Copper accounted for 11 percent this year, down from 23 percent during the previous year. Gold also dominated M&A transactions by volume for the first half of the year with 33 percent of all transactions; this represented a 4 percent increase on H1 2012. The most notable deal for a gold company, with the exception of the acquisition of Polyus, saw Hecla Mining Company purchase Aurizon Mines Ltd for $775m. New Gold Inc also purchased Rainy River Resources Ltd for around $310m.

Copper held steady at 14 percent of all transactions. Diversified metals accounted for 22 percent of all deals by volume; up considerably compared with the 8 percent of deals seen in 2012 (excluding Glencore).

The downward trend for transactions involving coal and iron ore continued into its second year in the first half of 2013. Coal and iron ore-related deals dominated activity in 2011 before tailing off in 2012. The decline in deals involving companies that produce steel-making ingredients is attributed to a drop in coal and iron ore prices over the last two years. The largest coal-based deal in H1 2013 saw Jindal Steel & Power Ltd offer $553m for Gujarat NRE Coking Coal Ltd.

Despite the ongoing struggles around the uranium industry, there were some deals in the first half of the year. Russian state firm ARMZ Uranium Holding Company bid $1.3bn for Canadian firm Uranium One Inc. This deal is particularly significant as uranium prices have continued to remain low since the 2011 tsunami in Japan, which helped to foster an air of mistrust around the safety and feasibility of nuclear power.

Geographical shift

In a surprising development, Russia and Kazakhstan were the most active nations by geography in terms of deal making by value in the mining sector. Canada and China, the most active nations last year, slipped back a number of places in the rankings with just 6 percent and 5 percent of all deals respectively coming from those nations. According to the report, Russia accounted for just over a quarter of deals, followed by Kazakhstan at 19 percent, and the US with 11 percent.

The decision by Russian oligarch Mikhail Prokhorov to sell his 37.8 percent stake in Polyus guaranteed Russia top spot in terms of deal value. The deal for Polyus, the largest mining deal in H1 2013, saw the largest gold producer in Russia and one of the top 10 gold miners globally change hands for $3.6bn. Mr Prokhorov’s fellow Russian oligarch Suleiman Kerimov retains a 40.2 percent share in the company. Twenty-two percent of Polyus’ shares are publicly held via the company’s listing on the London Stock Exchange, the remaining shares in Polyus are held by another of the oligarchs, Zelimkhan Mutsoyev. Polyus has more than 83 million ounces of proven and provable reserves. The firm’s principal operations are in the east of Russia, where it has five working mines and a number of advanced development projects.

Kazakhstan had the second and third largest deals, and ranked second highest on the list thanks to the $2.2bn buyout of Eurasian Natural Resources Corp by the company’s three founders.

Slow progress

According to PwC’s report, although the first half of the year was “exceptionally slow”, deals are still being made globally. Those deals, however, look a lot different to some of the mega deals that the industry had grown accustomed to in recent years. Buyers are looking for joint ventures or spin offs rather than acquiring companies outright. Furthermore, the mining sector has also seen a number of sovereign wealth funds enter the market looking to acquire stakes in companies.

The report notes that more private equity firms are starting to enter the market. Many funds are beginning to look for long life projects, particularly at low cost, which is eminently possible in today’s market. One of the advantages held by private equity firms over other mining companies is the abundance of cash available to those firms for purchases. Also, in many cases private equity firms are not subject to the same level of public scrutiny by shareholders.

In H1 2013, well known firms such as Blackstone Group, Apollo Global Management, KKR & Co and the Carlyle Group were all rumoured to be interested in entering the mining sector as potential new owners of the wide range of available assets. Adding further fuel to the rumours of widespread PE interest in the mining sector, PwC notes in the report that a number of mining firms are preparing to divest non-core units as they look to reduce debt and raise much needed capital.

Outlook for H2 2013

In light of the renewed feeling of austerity in the mining sector, H2 2013 will likely see the continuation of the sale of assets. PwC reports that buyers will look to take advantage of the current low valuations in the sector and try to purchase assets at reduced prices. Additionally, because of the tight financial conditions currently being experienced within the sector, many mining companies will continue to seek new and inventive ways of reaching agreements. Joint ventures, royalty and streaming agreements, and Asian state owned enterprises are all likely to be major influences on the shape of the sector throughout the remainder of the year. The escalating demand for resources from Chinese firms is also expected to drive M&A activity in the second half of 2013 and beyond. Although China has shifted its focus more towards consumer spending, demand for metals is still there. There is also additional demand for resources from other emerging nations, Brazil and India in particular.

While the mining sector in general continues to experience slow growth, the onus will remain on mining companies themselves to adjust to the latest phase in the cyclical nature of the industry. In order to do this, organisations must respond to rising costs and unpredictable commodity prices by cutting costs wherever possible, delaying the launch of projects and divesting non-core assets. Furthermore, many companies will need to seek out alternative sources of finance − to this end, sovereign wealth funds and other private players will be crucial.

PwC predicts that the mining industry will remain lethargic throughout the rest of 2013 and into next year. Deals are expected to come together, however, for companies that have enough available cash and the inclination to make the most of any opportunities that might present themselves.

Richard Summerfield