Market volatility slows mining M&A activity thus far in 2012: PwC

TORONTO—Global economic uncertainty and a drop in commodity prices has led to a marked slowdown in mining mergers and acquisitions (M&A) in the first half of 2012, according to a new report.

The Mining Deals report by PricewaterhouseCoopers (PwC) notes the slowdown, but says miners with cash are viewing it as an opportunity to take advantage of lower valuations by entering M&A discussions and finding creative ways to fund projects.

Global mining M&A deal volume fell more than 30 per cent in the first half of 2012 to 940 transactions, as compared with 1,371 transactions for the same period in 2011.

Meanwhile, the total value of deals for the first six months of 2012 was $79-billion, slightly higher than $71-billion for the same period a year earlier, which includes Glencore International plc’s $53.6-billion offer for Xstrata plc.

Excluding that blockbuster deal, the total value of deals announced in the first half of 2012 drops to $25-billion, one-third of last year’s first half-year total, which reflects the market downturn.

“Even though market anxiety has led to a pullback in equity financing, most miners are in much better financial shape than during the 2008-2009 global financial crisis, and wiser having gone through it,” PwC Canadian mining deals leader John Nyholt said in a statement.

“With market conditions expected to remain tight for months to come, miners are looking for new ways to ensure future growth. M&A activity in the coming months will be spurred on by both opportunity and survival.”

According to Nyholt, these alternatives include companies with cash taking advantage of lower prices to buy smaller rivals considered too expensive only a few months ago.

Golden commodity

Gold dominated M&A transactions in the first half of 2012, according to the report, re-establishing its first-place position against other metals such as copper and coal, whose values have fallen while the price of bullion remained steady.

Gold represented the highest value of transactions at 26 per cent in the first six months of the year and the highest volume at 29 per cent, excluding the Glencore/Xstrata deal.

“Looking ahead, more gold transactions are going to take place because of lower valuations, a rising gold price and the growing challenge to find new resources to fuel future growth,” Nyholt said.

China’s growing deal momentum

While China’s growth has advanced by a modest 7.6 per cent in the second quarter after decades of averaging 10 per cent annually, PwC says demand is still strong.

“Rapid infrastructure growth in emerging nations, in particular China, will continue to drive demand for commodities such as copper, coal and iron ore,” Nyholt said. “That growth, along with urbanization in other emerging nations such as India (and) Brazil … will allow the ‘super cycle’ to continue for years to come.”

Excluding the Glencore/Xstrata transaction, China is behind Canada and the United Kingdom as the next largest acquirer, having nearly doubled its share of all mining deals over the first half of 2011.

“China is expected to continue to become a more aggressive acquirer of resource assets as it ramps up its foreign investment targets and looks to secure metals to meet steadily increasing urbanization,” Nyholt said.