Mining Giants Look for Bargains as Commodity Stocks Fall
Larger, cash-rich mining firms seem increasingly eager to buy up smaller, vulnerable rivals – but can the M&A trend continue despite economic uncertainties?
Mining M&A activity doubled in value in the first half of 2011, according to research from Ernst & Young. Deals totalled some $96.3 billion, up from $47.9 billion, despite the fact that the number of deals fell slightly, from 573 to 511.
Although activity slowed in the summer as fears over European and US sovereign debt intensified, the vast majority of analysts believe the second half of the year could bring even more mergers and acquisitions in the sector.
Ernst & Young LLP’s global mining transaction chief, Lee Downham, told Bloomberg: "I do see this momentum continuing and at the end of the year we'll see a higher value and higher volume of deals from 2010."
The reason for the expected boom in activity in the coming months is primarily the correction in commodity prices, which have hit the mining industry the hardest. Mining equities have seen their values fall and, as a result, some of the smaller firms have become vulnerable to being swallowed up by larger operators.
Some mining firms lost 30 per cent of their share values in the early August stock market meltdown. This, together with continued bullish predictions about long-term demand for metal products, particularly from China, mean major mining firms are looking for bargains in the form of their smaller rivals.
Many industry players are interested in making both hostile bids and friendly takeovers of smaller mining companies as a more cost-effective way to expand their mining activities. ‘At some point the cashed-up miners will no doubt calculate that it’s cheaper to buy than build,’ explained a report from analysts at BMO Nesbitt Burns Inc.
Ernst & Young spokesperson Paul Murphy, speaking at a mining forum in Australia, added, “You've got those smaller players who haven't got the access to funding as a means of warding off those corporate predators; we've already seen the start of some consolidation activity."
Continued confidence in Chinese economic expansion is driving this appetite for growth in the mining sector. Although there has been plenty of uncertainty surrounding the potential for growth, after the rate of growth began to slow earlier this year, there is enough confidence among analysts for the mining firms to continue the race to offer China the natural resources it is expected to demand in the coming years. Jac Nasser, the chairman of BHP Billiton, the largest mining firm in the world, told audiences at the American Chamber of Commerce meeting in Australia last week: “What I’m really confident about is that China will continue to grow.”
Precious metals are another driver of the M&A activity. The more vulnerable the global economy looks, the greater the demand for gold and silver. Gold prices seem to be hitting new record highs on a weekly basis at the moment, as investors search desperately for safe havens for their cash.
Despite the bullishness from analysts and mining firms, dealmakers may have to wait a while for this predicted M&A boom due to the intense volatility in the markets. Commodity prices could be driven even lower by fresh market slumps in the coming days and weeks, and deals are likely to be put on hold as large firms wait to see if their targets become even cheaper. Meanwhile, currency fluctuations are causing a headache for accountants who may also call for a short pause in M&A activity.