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Report: "Mergers, acquisitions and capital raising in the mining and metals sector — 1H 2012"

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Global economic uncertainty and market volatility have subdued …

Global economic uncertainty and market volatility have subdued
deal value and volume in 1H 2012, but strong balance sheets
among producing companies, favorable long-term fundamentals
and lower valuations are creating an attractive environment
for M&A. Read the full report here.

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  • 1. Mergers, acquisitions andcapital raising in the miningand metals sector — 1H 2012 BHP Billiton quarterly briefing 1
  • 2. Mergers, acquisitions and capital raising inthe mining and metals sector — 1H 2012Escalating capital costs and softening pricesare forcing mining and metals companies torethink investment decisions. This mayherald a shift in focus from ‘build’ to ‘buy’.However, resource nationalism and macro-economic issues are making decisionsdifficult. This is reflected by the steadydecline in deal volume since 2010.Synergistic and ‘one chance’ deals continueto be undertaken, while more speculativedeals are being deferred. The majors are ableto access capital, but remain focused onmaintaining investment grade credit ratings,driving efficiency and reducing financingcosts. This suggests that there is capacity inthe market to support activity that bestdemonstrates attractive returns — includingM&A and return of capital to shareholders.Equity is tightening amid widespreadvolatility and risk aversion, impeding thetiming and pricing of IPOs. Early stagejuniors face particular challenges, withwidespread implications for explorationactivity. Majors themselves are becoming anincreasingly important source of capital, asthey look to invest in future growth throughminority holdings and joint venture positions.Note: The data is primarily sourced from ThomsonONE. $ refers to US dollars.2 Mergers, acquisitions and capital raising in the mining and metals sector — 1H 2012
  • 3. Value and volume of deals by size M&A activity Global economic uncertainty and market volatility have subdued Y-o-Y 1H 1H Y-o-Y 2010 2011 change 2011 2012 change deal value and volume in 1H 2012, but strong balance sheets among producing companies, favorable long-term fundamentals Volume 1,047 1,008 -4% 580 470 -19% and lower valuations are creating an attractive environment Value ($m) 113,706 162,439 43% 89,746 55,679 -38% for M&A. Average There were 20 megadeals (>$1b) completed in this half, up from value ($m) 101 161 59% 155 118 -24% 15 in the same period last year — reflective of opportunistic and synergistic M&A. Activity in June suggests a pick up in Cross border momentum, with deals totaling $10b completed (up 88% month 64% 62% -2% 60% 63% 3% (% share) on month), and an increase in 1H 2012 volumes on 2H 2011 (although volumes are down year on year).Value of deals by target region ($b) Higher cross border deal share is being seen, despite a consolidation drive in commodities such as coal and steel. Asia Pacific 19.1 Developed market assets were increasingly targeted by BRIC1 and emerging market players seeking to secure resources.North America 10.4 The Asia-Pacific region was both the preferred destination and the Africa 9.0 most active acquirer, with China dominating deal activity. Chinese mining companies acquired domestic and cross border targets inLatin America 8.1 equal measure, completing deals worth a combined $17b. Australia closely followed, largely driven by domestic consolidation Europe 5.9 among coal companies. North American deal activity more than halved in comparison with 1H 2011, primarily due to reduced CIS 3.2 domestic consolidation activity within the region. This may change in light of the current shake up of the US coal market. Major European players continued to be acquisitive, seeking toValue of deals by acquiring region ($b) achieve growth through outbound M&A. The largest of these deals Asia Pacific 25.2 was KGHM Polska Miedz’ acquisition of Canada’s Quadra FNX Mining for $3.3b.North America 12.1 In Africa, the Democratic Republic of Congo and Sierra Leone Europe 9.3 were the most-targeted, for copper and iron ore assets, despite the higher risks associated with these nations. This highlights theLatin America 5.0 strategic importance of mineral supply. CIS 3.5 Africa 0.6 1 Brazil, Russia, India and China Mergers, acquisitions and capital raising in the mining and metals sector — 1H 2012 3
  • 4. M&A outflows for key nationsDeal values in $b 2.0 6.1 1.5 1.3 1.4 Russia 1.1 UK 3.0 0.2 Germany Canada 0.6 1.1 0.7 Mongolia 3.3 Belgium 1.4 Kazakstan 0.2 0.2 Switzerland 1.0 1.6 0.2 0.5 2.3 Greece China US 8.5 Japan 1.9 8.7 Mexico 1.5 Colombia Sierra Leone 1.3 0.4 Democratic Republic of Congo 1.3 0.5 1.8 Namibia 2.3 3.6 Chile 0.8 Australia 1.0 0.4 Argentina 0.9 0.7 1.5 South Africa 0.3 Domestic (bubble size = deal value) Outbound (bubble size = deal value)Commodities — coal remains top target M&A outlookCoal remains the most targeted commodity in 1H 2012 in value We expect to see continued uncertainty and volatility in theterms at $12.4b, despite a year-on-year decline in activity as market throughout 2012. Those companies with a bullish outlooklower shale gas prices weakened coal demand. Coal acquisitions on China, and that can work with volatility, will be the dealmakerswere driven by: this year.• Power utilities and trading companies buying assets to secure The following factors are likely to drive future deal flow: supply • Lower valuations, which may drive opportunistic deal activity• Consolidation in order to achieve synergies and economies of • A prevailing focus on M&A in familiar territory during volatile scale, particularly in Australia due to the inflationary cost times; this may take the form of domestic consolidation or environment companies seeking to build on their minority holdings and JV• Large players looking to boost production capacity positions.Copper was the second most sought-after commodity in 1H 2012, • Synergistic, ‘one chance’ deals if valuation metrics permitwith $9.2b of deals completed. Activity was driven by strong • Increasing costs of organic projects driving a greater focus onlong-term demand fundamentals and competition for scarce, M&A by the producersquality assets. Steel deals took the third largest share of dealvalue, reflecting consolidation among China’s fragmented steel Greater scrutiny on investment returns will force management tosector in an effort to remove excess capacity, reduce costs and adopt more sophisticated bid tactics and focus on synergies andimprove margins. unique competitive advantages.Gold deals took the highest share of deal volume at 160 in We expect to see more divestment activity, and an increased focus1H 2012. However, there have been fewer sizeable deals on portfolio management, in the face of rising costs. Nearly 70%compared with the same period in 2011, resulting in a relatively of mining and metals respondents in Ernst & Young’s Capitallow average deal value of $40m (down from $62m during Confidence Barometer (April 2012) confirmed they are planning1H 2011). divestments in the next 12 months to focus on core assets.Expectations of a demand rebound in uranium is triggeringacquisitions to secure future supply in the current depressedpricing environment — deal value and volume has increasedyear on year.4 Mergers, acquisitions and capital raising in the mining and metals sector — 1H 2012
  • 5. Capital raising trendsCapital raising by asset class — proceeds raised (2007–1H 2012) Challenging markets contributed to a 400 decrease in capital raising activity in 1H 2012, compared with the same period 350 a year ago. Total proceeds fell 35% to 300 $123b, with a 16% decline in volume of 250 issues. There has been almost a 50% reduction in the number of companiesProceeds $b 200 raising capital, and a marked decline in 150 equity raising due to market volatility. 100 However, corporate bond activity continues 50 to break records, following on from a 0 strong 2011. 2007 2008 2009 2010 2011 1H 2011 1H 2012 IPOs Follow-ons Convertibles Bonds LoansCapital raising by month — proceeds raised (2012) 25 20 15 Proceeds $b 10 5 0 Jan Feb Mar Apr May Jun Equity Bonds Loans Mergers, acquisitions and capital raising in the mining and metals sector — 1H 2012 5
  • 6. IPOs — a dramatic drop-off Follow-on equity — in free-fall Convertible bonds — project-Market volatility has had a profound impact Proceeds raised from follow-on issues of based fundingon 2012 IPOs across all sectors. The equity are also down significantly year on Convertible bonds showed a year-on-yearmining and metals sector has been year, following a particularly volatile increase in volume and proceeds inparticularly impacted due to a decline in 2Q 2012. Volume declined by 18%, while 1H 2012, largely driven by small-scaleinvestors’ appetite for risk, and lower proceeds dropped 69% to $10b, from project-based funding for advancedvaluations, which have resulted in issues $32b in 1H 2011. This was the result of juniors/mid-tiers unable to access straightbeing too dilutive for foundation fewer large issuers and a reduction in bonds. Over $2.1b of proceeds wereshareholders. funding to the juniors. raised, compared with $2.0b in the sameIPO volume fell 37% to 47 IPOs in Mid-tiers and advanced juniors attracted period a year ago. Convertibles can be an1H 2012. Proceeds decreased by a equity investment to fund the development attractive investment option in periods ofsignificant 80% (excluding Glencore) to of quality projects and acquisitions. volatility, offering investors some downside$0.9b, from $4.3b in 1H 2011. However, early stage explorers are faced protection. with fewer options and challenging market Australian issuers took the highest share ofAll major mining capital markets were conditions, with average proceeds by this proceeds, offering opportunities forimpacted, with lower volumes, reduced group falling to $3m in 2Q 2012. investors to participate in the growthprices and deferrals experienced on theHong Kong, London, Australian and potential of Australia’s mining industry. WeToronto exchanges. have also witnessed a number of strategic investors taking cornerstone positions inThe largest share of proceeds were raised convertible bonds during the first half ofin Hong Kong ($644m), with the TSX- the year, including Mount Kellett CapitalVenture exchange attracting the highest Management in Lynas Corp’s $225m issue,share of junior IPOs at 22 — still a 53% and China Railway Materials in Africanyear-on-year decline. The largest cross- Minerals’ 8.5% notes due 2017.border IPO was that of China’s Rare EarthsGlobal, which closed the half with a marketvalue of $322m, listing on AIM to capitalizeon demand outside of China.IPOs remain on the corporate agenda butin such a volatile market, only the ASX andTSX-V are seeing real volumes. A relativelysmall number of explorers are raisingminimal funds through IPO in order to gaina market presence for future raisings.Short term financing solutions (includingprivate placements and debt facilities) arebeing sought as an interim solution forthose in need of immediate capital.6 Mergers, acquisitions and capital raising in the mining and metals sector — 1H 2012
  • 7. Corporate bonds — continued Syndicated loans — major Capital raising outlookdemand drives record proceeds refinancing, but little project We expect the corporate bond market toThe popularity of corporate bonds financing remain strong in 2012 for investmentcontinued during 1H 2012, with a 29% grade issuers, with sustained but volatile Syndicated loan proceeds declined 46% inincrease in proceeds to $59b from $46b demand for higher-yielding sub-investment 1H 2012, to $51b from $95b in 1H 2011.year on year. Corporate bonds remained an grade issues by mid-tier companies for Large deals have been reserved for A-ratedattractive funding option for the majors project development. With funding options borrowers with strong bankinglooking to refinance, push out maturities (both equity and debt) tightening for relationships — for example, Glencore’sand lock-in favorable long-term yields. juniors, we may see bond investors with $12.8b refinancing with a 91-strong higher risk appetites (such as hedge funds)The first half of 2012 was about windows syndicate of lenders. However, with over willing to fund quality projects in smallerof opportunity, reflecting fluctuating half of this year’s loan proceeds used to companies.market confidence. There was a slow start refinance existing agreements, very littleand end to the first six months, with a clear new money is flowing in, particularly for The IPO markets are expected to remainpreference for quality compared with project finance. During 1H 2012, $2.9b difficult, with companies unlikely to pursue1H 2011. But mid-tier companies found worth of project finance was closed, the large issues in the very short term, at suchpockets of demand in March and May for largest deal being a $1b facility for First dilutive levels. Signs of recovery in globalhigh yield issues and we expect that Quantum Minerals’ Kansanshi copper mine. equity market conditions over the secondsustained (albeit volatile) demand for yield A mandated pipeline of $10.8b in 2012 is half of 2012 could lead to an increase inshould provide valuable support for still to be financed. IPO activity in Q1/Q2 2013.mid-tier producers and advanced juniors in With Basel III making it increasingly difficult Markets are volatile and sentiment-driven:the second half. for Western banks to provide anything pockets of confidence will drive investorThe first half of 2012 witnessed a greater other than short-term loans at competitive demand, but companies may increasinglyshare of volume by emerging market prices, we will continue to see a significant look to strategic investors willing to investissuers accessing US dollar investors, shift away from traditional long-term, for the long-term. Funding may come fromlooking to secure rates ahead of an project-based bank lending in the sector, Asian lenders, made via co-investments inexpected increase in US treasury yields. and an increased role for alternative overseas projects with local state partnersNearly $9b of investment grade Euro lenders and funding structures. such as infrastructure developers. Suchbonds were raised, despite challenging investment often comes with additionalmarket conditions in the Eurozone, ties, however, such as a share of futurereflecting investor demand for quality offtake. Multiple options need to beinvestment opportunities. pursued to raise finance at the right price, in order to create competitive tension andRecord low coupons were again achieved ensure that reliance is not placed on justby investment grade majors. Conversely, one source of finance.yields remained relatively high for sub-investment grade mid-tier companies,driving demand among yield-seekinginvestors. Mergers, acquisitions and capital raising in the mining and metals sector — 1H 2012 7
  • 8. Ernst & Young’s Global Mining & Metals Center Ernst & YoungWith a strong but volatile outlook for the sector, the global mining and metals industry is Assurance | Tax | Transactions | Advisoryfocused on future growth through expanded production, without losing sight of operationalefficiency and cost optimization. The sector is also faced with the increased challenges of About Ernst & Youngchanging expectations in the maintenance of its social license to operate, skills shortages, Ernst & Young is a global leader ineffectively executing capital projects and meeting government revenue expectations. assurance, tax, transaction and advisory services. Worldwide, our 152,000 peopleErnst & Young’s Global Mining & Metals Center brings together a worldwide team of are united by our shared values and anprofessionals to help you achieve your potential — a team with deep technical experience unwavering commitment to quality. Wein providing assurance, tax, transactions and advisory services to the mining and metals make a difference by helping our people, our clients and our wider communitiessector. achieve their potential.The Center is where people and ideas come together to help mining and metals companiesmeet the issues of today and anticipate those of tomorrow. Ultimately it enables us to help Ernst & Young refers to the global organization of member firms ofyou meet your goals and compete more effectively. It’s how Ernst & Young makes a Ernst & Young Global Limited, eachdifference. of which is a separate legal entity. Ernst & Young Global Limited, a UKArea contacts company limited by guarantee, does not provide services to clients. For moreGlobal Mining & Metals Leader United Kingdom & Ireland information about our organization,Mike Elliott Lee Downham please visit www.ey.com.Tel: +61 2 9248 4588 Tel: +44 20 7951 2178michael.elliott@au.ey.com ldownham@uk.ey.comOceania Americas and United States LeaderScott Grimley Andy MillerTel: +61 3 9655 2509 Tel: +1 314 290 1205scott.grimley@au.ey.com andy.miller@ey.comChina and Mongolia CanadaPeter Markey Tom WhelanTel: +86 21 2228 2616 Tel: +1 604 891 8381peter.markey@cn.ey.com tom.s.whelan@ca.ey.comJapan South America and Brazil LeaderAndrew Cowell Carlos AssisTel: +81 3 3503 3435 Tel: +55 21 2109 1606cowell-ndrw@shinnihon.or.jp carlos.assis@br.ey.comEurope, Middle East, India Service line contactsand Africa Leader Global Advisory LeaderMick BardellaTel: +44 20 795 16486 Paul Mitchellmbardella@uk.ey.com Tel: +86 21 2228 2300 paul.mitchell@cn.ey.comAfrica Global Assurance LeaderWickus BothaTel: +27 11 772 3386 Tom Whelan © 2012 EYGM Limited.wickus.botha@za.ey.com Tel: +1 604 891 8381 All Rights Reserved. tom.s.whelan@ca.ey.com SCORE Retrieval File OC00000205Commonwealth ofIndependent States Global IFRS Leader This publication contains information in summary form and is therefore intended for general guidance only. ItEvgeni Khrustalev Tracey Waring is not intended to be a substitute for detailed researchTel: +7 495 648 9624 Tel: +44 20 7980 0646 or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Youngevgeni.khrustalev@ru.ey.com tracey.waring@uk.ey.com organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. OnFrance and Luxemburg Global Tax Leader any specific matter, reference should be made to the appropriate advisor.Christian Mion Andy Miller www.ey.com/miningmetalsTel: +33 1 46 93 65 47 Tel: +1 314 290 1205 ED 0113christian.mion@fr.ey.com andy.miller@ey.comIndia Global Transactions LeaderAnjani Agrawal Lee DownhamTel: +91 982 061 4141 Tel: +44 20 7951 2178anjani.agrawal@in.ey.com ldownham@uk.ey.com

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