Mergers, acquisitions and capital    raising in mining and metals                            2012 trends                  ...
2   Mergers, acquisitions and capital raising in mining and metals
About this study     • The data is primarily sourced from ThomsonONE.com.     • Unless otherwise stated, all values are in...
This report was authored by:                  Lee Downham                                                          Robert ...
ContentsThemes                            Commodity                                  analysis                             ...
Executivesummary                                                        2012: the emergence of a two-tier    “As tradition...
Equity markets suffered in the face of economic and political                      via debt, lending and equity markets be...
An emerging valuation gap has                                                                            Challenging tradi...
“We expect 2012 to represent the peak of the capital                         strike. Stronger balance sheets are expected ...
Q&A with China                                      Corporation                                      Q: CIC has invested i...
Investment    and volatility of a business. What are the            period immediately after the GFC), the                ...
SpotlightThe rise of a new class of investorA key characteristic of 2012 deal activity was                                ...
“The funding gap is being filled by private investors                                                                      ...
“The Japanese trading houses will be looking                                   to return investment to the sector, which w...
Commodity traders — more than toe-dipping                                                    What does this mean for the i...
Mergers &                                                        Commodity analysis     acquisitions                      ...
Global macro-economic uncertainties took center stage                                                    in the world’s la...
Mega deals (2012)Rank Value          Type           Target Name           Target         Target    Acquirer               ...
Two main themes dominated M&A across the sector in 2012:                      Another emerging trend in 2012 was the incre...
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young
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Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young

  1. 1. Mergers, acquisitions and capital raising in mining and metals 2012 trends 2013 outlook When opportunity knocks, who answers?
  2. 2. 2 Mergers, acquisitions and capital raising in mining and metals
  3. 3. About this study • The data is primarily sourced from ThomsonONE.com. • Unless otherwise stated, all values are in US dollars. Notes on the data: Mergers and acquisitions (M&A) Capital raising • Only completed deals are included. Deals The primary source for this data is identified as incomplete, pending, partly ThomsonONE. Certain details have been incomplete, conditional or intended as of supplemented with information from 31 December 2012 were excluded. company and stock exchange websites • The acquirer country is based on and major business press. Only completed the ultimate owner’s geographic transactions are included. headquarters. The target country is • Only original Initial Public Offerings determined by where the primary (IPOs) — the first time that a company targeted asset or company is located. issues equity to the public — are • Country-based refers to domestic and included in the IPO analysis. Proceeds inbound deals. are allocated to the primary exchange of listing. • A country’s acquisition refers to domestic and outbound deals. • Equity issues are geographically categorized by the primary exchange • Commodity analysis is based on the where the issuer’s stock trades, except company’s primary commodity focus. where stated. Where a company offers • The value of M&A activity by commodity Global Depositary Receipts or American includes deals where the given Depositary Receipts, the issue is commodity is the acquirer and/or allocated to the destination market of target’s primary commodity. Commodity those shares. charts illustrate the value of deals where • Loan data and proceeds include the given commodity is the target. refinancing and amendments to existing • The data does not capture the value of debt, and are as per Thomson ONE transactions where this information is intelligence. Proceeds are allocated to not publicly available. the geography of the borrower. • ‘Mega deals’ refer to all deals with a • All credit rating references are to value equal to, or greater than, $1b. Standard & Poor’s long-term issuer ratings, unless otherwise stated. Mergers, acquisitions and capital raising in mining and metals — 2012 trends, 2013 outlook This Ernst & Young study examines transactions and financing in the mining and metals sector in 2012, and discusses the outlook for 2013. It provides an in-depth analysis of the major global mining and metals transactions, capital markets and resulting capital flows, by considering mergers and acquisitions (M&A), initial public offerings (IPOs), secondary equity offerings, bonds and loans. It also provides an analytical breakdown by country and commodity.Mergers, acquisitions and capital raising in mining and metals 3
  4. 4. This report was authored by: Lee Downham Robert Stall Global Mining & Metals Americas Mining & Metals Transactions Leader Transactions Leader Ernst & Young, UKI Tel: +1 404 817 5474 Tel: +44 20 7951 2178 robert.stall@ey.com ldownham@uk.ey.com Mike Elliott Kunihiko Taniyama Global Mining & Metals Leader Japan Mining & Metals Ernst & Young, Australia Transactions Leader Tel: +61 2 9248 4588 Tel: +81 3 4582 6470 michael.elliott@au.ey.com kunihiko.taniyama@jp.ey.com Nicky Crabtree Emily Colborne Assistant Director, Mining & Metals Strategic Analyst, Mining & Metals Transactions Advisory Services, UKI Ernst & Young, UKI Tel: +44 20 7951 5237 Tel: +44 121 5352086 ncrabtree@uk.ey.com ecolborne@uk.ey.com Paul Murphy Sameera Sandhu Asia-Pacific Mining & Metals Senior Analyst, Mining & Metals Transactions Leader Ernst & Young, India Ernst & Young, Australia Tel: +91 124 470 1418 Tel: +61 3 9288 8708 sameera.sandhu@in.ey.com paul.murphy@au.ey.com And thank you to the Ernst & Young Global Mining & Metals team for their support.4 Mergers, acquisitions and capital raising in mining and metals
  5. 5. ContentsThemes Commodity analysis Country analysis06 | Executive summary Aluminium 37 Spotlight — Africa 48 Coal 38 Spotlight — Latin America 5110 | Q&A with China Copper 39 Australia 53 Investment Corporation Gold 40 Canada 54 Iron ore 41 China 5512 | Spotlight — The rise of a Nickel 42 India 57 new class of investor Potash/Phosphate 43 Indonesia 5816 | Mergers & acquisitions Silver/Lead/Zinc 44 Japan 59 Steel 45 Russia 6025 | Capital raising Uranium 46 South Korea 61 United Kingdom 6234 | Outlook United States 63 Mergers, acquisitions and capital raising in mining and metals 5
  6. 6. Executivesummary 2012: the emergence of a two-tier “As traditional sources of capital capital environment and M&A have contracted, a During 2012, we witnessed a fall in overall capital raising proceeds new class of investor has grown for the first year since 2009. in importance, both as a source Economic uncertainty created volatility and risk aversion of capital and a driver of M&A among investors, limiting capital raising options for mid-tier activity during 2012.” and junior mining and metals companies, but generating unique opportunities for the industry’s relative safe havens — the Lee Downham investment grade producers. Global Mining & Metals Transactions Leader, Capital raising by asset class — proceeds (2007–2012) Ernst & Young, UKI 400 350 300 Proceeds $b 250 200 150 100 50 0 2007 2008 2009 2010 2011 2012 IPOs Follow ons Convertibles Bonds Loans 2012 saw unprecedented demand from high-grade investment funds for primary debt issuance. Such demand was the result of substantial capital inflows from an increasingly risk averse investor universe, set against a backdrop of volatile markets and fragile economic news flow. Investment grade borrowers took full advantage of this flight to quality as they issued long-dated bonds at pricing levels many banks struggled to match. Investment grade issues totaled $73b for the year, comfortably exceeding the 2011 figure of $57b, as the large-cap producers raised capital for organic growth and to refinance existing debt. The high yield1 bond market was volatile due to its sensitivity to news-driven sentiment. This limited capital flow to the sector’s mid-tier companies, and increased the cost of borrowing, with average spreads on high yield debt widening by some 200 basis points (bps) compared with 2011. 1 Sub-investment grade (“junk” or high yield) debt, considered to have significant speculative characteristics, holding a higher risk of default. High yield is defined as an issue with an S&P rating equal to or less than BB+ and a Moody’s rating equal to or less than Ba1.6 Mergers, acquisitions and capital raising in mining and metals
  7. 7. Equity markets suffered in the face of economic and political via debt, lending and equity markets became increasinglyturbulence. Initial Public Offering (IPO) markets were practically constrained. As a result, non-traditional sources of finance haveclosed on anything other than highly-dilutive terms, with a year- grown in prominence — injecting much needed capital into theon-year 40% fall in volume and 81% decline in proceeds (even sector and driving M&A activity. The share of deal value for theseexcluding Glencore). The $305m IPO of Ivanplats on the Toronto acquirers has grown year-on-year to account for 31% of totalStock Exchange (TSX) in October was the year’s bright spot and 2012 deal value, compared with just 21% in 2011.brings hopes of a revival in confidence. In the presently constrained capital environment, managementWe also saw a significant fall in total loan proceeds to $106b from are seeking alternative funding options and are increasingly$187b in 2011, as banks reduced their exposure to risk assets in innovative and resourceful in identifying funding solutions.response to increased capital requirements under Basel III. This In value terms, state-backed and financial investors accounted forwas met with less demand from investment grade companies, the largest proportion of M&A by non-traditional acquirers duringopting to secure bond finance often on more favorable terms. 2012, as this growing class of investor increasingly participatesThe reduced availability of bank loans increased borrowing costs in, and facilitates, the growth of the industry.and restrictive covenants for all but the largest companies, with In addition to the state-owned enterprises (SOEs) and sovereignaverage spreads on leveraged loans widening to 389bps above wealth funds (SWFs), which are primarily looking to secure thethe benchmark, from 266bps in 2011. strategic supply of materials, other financial investors, believingM&A itself was used as a source of the sector to be currently undervalued, appear to be seeking pure financial returns from anticipated future upside to thefinance during 2012, with a new class current cycle.of investor emerging The motivations for investment differ from deal to deal and areTraditional M&A and financing has become increasingly discussed in more detail in our spotlight analysis, The rise of amarginalized following the global financial crisis (GFC), as new class of investor.corporates focused less on pure M&A and as access to capitalIllustration of the growth of non-traditional investors’ share of industryfinancing/M&A (not to scale) Non-traditional Pre GFC: Traditional M&A investors Examples Primary Expansion investment Consolidation drivers providers Post GFC: Traditional M&A Non-traditional investors Mergers, acquisitions and capital raising in mining and metals 7
  8. 8. An emerging valuation gap has Challenging trading conditions created stunted overall M&A activity an era of capital optimization for Buyer and seller agreement on deal valuation has become producing miners increasingly difficult to bridge in 2012 due to the volatility of The mining and metals sector is facing some of the most commodity prices and growing divergence between mining challenging trading conditions since the GFC. Commodity prices and metals equities and commodity prices. Sellers have been have softened and operating and capital costs have soared, unwilling to accept lower valuations based on their depleted share resulting in squeezed margins. prices in 2012, looking back at 52-week highs and expecting healthy premiums. Additionally, the safe havens (the investment grade producers) have become victims of their own success. The prior years of This divergence is causing longer, more complex deal negotiations, strong growth, prudent balance sheet management and exposure resulting in sluggish M&A at best. Chinese private equity firm to emerging market demand attracted a new breed of investor to Cathay Fortune’s now lapsed hostile takeover bid for Australian share registers. During 2012, these investors have shown greater copper junior, Discovery Metals, is a prime example of the conservatism and are demanding shorter return timeframes for valuation gap that emerged in 2012. As a result of these factors, new investments. both the value and volume of M&A completed in the mining and metals sector has decreased; 941 deals completed during 2012, Applying this mindset to investment decisions in a capital- amounting to $104b, representing a year-on-year decrease of 7% constrained and challenging trading environment prompted many and 36%, respectively. mining and metals companies to re evaluate their priorities during the second half of 2012, and a capital strike was declared. Capital Volume and value of deals by size (2003–2012) projects were rationalized and deferral plans were implemented on 250 1,200 all but the most important top-tier projects. 1,000 200 Relative commodity price performance (rebased at 1 January 2012) 800Value ($b) 150 Volume 160 600 100 400 140 50 200 120 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 100 <$200m Between $200m and $1b >$1b Volume 80 60 40 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 LMEX Index Iron ore Gold Coal Source: Thomson Datastream Companies also continued to review their portfolios and announced the divestment of non-core assets. Vale, Rio Tinto and BHP Billiton all announced divestment plans. M&A activity, for the most part, was lower down the agenda for the mining and metals majors. The M&A that did complete primarily took the form of the consolidation of existing stakes in assets, such as Rio Tinto’s acquisition of Richards Bay Minerals and Anglo American’s acquisition of De Beers. 8 Mergers, acquisitions and capital raising in mining and metals
  9. 9. “We expect 2012 to represent the peak of the capital strike. Stronger balance sheets are expected to emerge during the the second half of 2013, driving greater corporate activity.” Nicky Crabtree Assistant Director, Mining and Metals Transaction Advisory Services, UKIOutlook — a new wave of capital frustrated by weakening share prices and lower profitability. Shareholders are calling for companies to rethink capital allocationraising options as companies refocus decisions, and this will inevitably result in a greater focus onon growth capital recycling. As a result, leaner business models and stronger balance sheetsLong-term demand for the sector will continue to be driven will emerge during the second half of 2013 as companies continueby China and other BRIC (Brazil, Russia, India and China) to rationalize portfolios, unlock capital through divestments andand developing nations. The rapid cut-back of expansion and drive cost savings. We anticipate that companies will look to re-capital spending by many organizations is expected to slow focus on growth in late 2013 as the pressure to replace depletinglong-term supply and prolong a “super-cycle” scarcity premium. reserves and maintain production mounts — but the questionConsequently, those with access to capital and a long-term view remains as to whether this will take the form of building or buying.will seek to invest. While it is likely to be both, we expect to see a stronger buy-cycleThe capital strike is expected to continue until commodity during 2013, underpinned by lower valuations and in responseprices recover sufficiently to encourage new investment. to large cost overruns at several greenfield projects. BuyingFor example, we believe that the iron ore price would need to opportunities will be pursued by those companies that emergeexceed $130/tonne for a prolonged period of time to unlock the financially stronger and are able to access capital to drive M&A.next wave of expansion projects. Hence, M&A of iron ore juniorsbelow that level represent an option over future supply shortfalls.This capital strike will also impact the majors as a consequence of The Capital Agendatheir 2012 asset reviews. A number of high-cost mines are high Based around four dimensions, the Capital Agenda helpscost because they have been starved of capital in recent years. We mining and metals companies consider their issues andexpect a good number of these mines to be divested by the majors challenges and understand their options to make more informed capital decisions.to owners with capital available for acquisition and reinvestment. 1. Preserving capital: reshaping the operational andThe 2013 capital raising environment is expected to be shaped capital baseby the continued shift from traditional capital markets funding to 2. Optimizing capital: driving cash and working capital andnon-traditional capital providers. managing the portfolio of assetsThe announcement in January 2013 of a delay to full 3. Raising capital: assessing future capital requirements andimplementation of, and changes to, Basel III liquidity requirements assessing funding sourcesis unlikely to herald a significant change in lending behavior in 4. Investing capital: strengthening investment appraisal andthe year ahead. As a result, we believe there will be a continued transaction executionscarcity of longer-term commercial bank lending under Basel III, How organizations manage their capital agenda today willwith private, strategic lenders, equipment providers and national define their competitive position tomorrow.and development banks taking the role of project financiers.A slow and steady revival in equity markets is anticipated as Ernst & Young works with our clients to help them make betterconfidence returns and a strong pipeline of cross border IPOs and more informed decisions about how they strategicallyeagerly await the return of the market. manage capital and transactions in a changing world. Whether you’re preserving, optimizing, raising or investing capital,Corporate bonds will remain a popular source of finance during Ernst & Young’s Transaction Advisory Services bring together athe year ahead, and we see the potential for an increased flow of unique combination of skills, insight and experience to deliverfunds into the high yield sector, supporting the industry’s mid-tier tailored advice attuned to your needs — helping you drivegrowth as the investment grade market becomes saturated and competitive advantage and increased shareholder returnsinvestors chase greater yields. through improved decision-making across all aspects of yourShareholders’ demands for greater dividends may threaten capital agenda.growth during 2013, where investors have been increasingly Mergers, acquisitions and capital raising in mining and metals 9
  10. 10. Q&A with China Corporation Q: CIC has invested in a number of Q: During the past year, state-owned mining and metals companies through enterprises, sovereign wealth fundsQ&A with Felix P. Chee, the acquisition of minority interests. and financial investors have been What are the key characteristics of increasingly active in the mining andChief Representative, China the mining and metals sector that are metals sector. There is also a growingInvestment Corporation’s attractive to CIC? trend in “toehold” investments or acquisitions of minority interests.Representative Office A: We look at the long-term fundamentals How would CIC differentiate itself as and investment merits instead ofin Toronto. focusing on the near-term prospects the partner of choice in conducting of certain commodities and how to overseas investments?Interviewed by Ramona Cheng manage the short-term volatility. If A: CIC is mandated to focus on investment you buy into the growth prospects opportunities out of China. While we of the BRIC countries — in particular, pursue significant minority investment China — you will invest in the positive opportunities, we do not take control long-term fundamentals of the sector. or conduct hostile takeovers. Our key China’s rapid growth in urbanization has differentiators from other investors are: increased the demand for commodities, 1. Our ability to accelerate the growth putting pressure on the supply side plan of our investee companies with (especially for high quality assets). This respect to China which could result in turn results in a favorable investment in a “halo effect” on the valuation,Mr. Felix P. Chee environment. be it developing key relationships orChief Representative,CIC Representative Office in Toronto When evaluating investment identifying and pursuing synergistic opportunities in the mining and metals opportunities in China sector, we focus on the quality and 2. Our ability to co-invest in growth location of the assets, including the opportunities and bring in other geopolitical environment where the sources of financing (such as debt assets are located. Given the increasing financing and project financing, concerns over cost inflation and if required) resource nationalism, we are quite discerning as to the location of potential In today’s capital-constrained assets and in particular, we scrutinize environment and where growthRamona Cheng opportunities in China are of strategic the ease of extraction, the grade, theAmericas Markets Leader importance, CIC offers compellingChina Business Network required infrastructure development, asErnst & Young, Canada well as the stability of the jurisdiction. strategic value to our investee companies as a significant minority In addition, as a minority financial investor. investor, we need to partner with an established operator with strong Q: The mining & metals sector is fundamentals. For example, we invested confronted by many challenges today, in Teck Resources during 2009 — one such as resource nationalism, cost of the few integrated mining companies inflation, skill shortages, to name a few. located in Canada (a stable jurisdiction As a minority investor, you do not have and a developed country), which met all the operational control of the business of our key criteria. to actively manage the underlying risks
  11. 11. Investment and volatility of a business. What are the period immediately after the GFC), the A: We have always adopted a two-pronged key considerations when you evaluate strategic acquirers and the majors now approach: prospective opportunities in this sector have much stronger balance sheets with 1. Direct investments, such as our and how do you manage the risks/ lots of liquidity to conduct acquisitions, investments in Teck Resources volatility in such an investment? resulting in more competition for and The Shanduka Group in the A: We focus on three main criteria when quality assets. You need to move faster mining sector and Penn West in evaluating an investment opportunity: and stay ahead of the curve in today’s the oil and gas sector environment. 1. Attractive financial returns over 2. Investments in other private equity 7 to 10 years of our ownership In areas where we can leverage the funds as a LP [i.e. limited partner] sector insights and operational expertise 2. Certain strategic elements (such of our investee companies, we would We are increasingly active in evaluating as a “China angle”) where CIC can pursue opportunities either through co-investment opportunities with other effectively leverage or help capitalize our existing investments in our investee private equity funds since high-quality 3. Ability to structure the deal in a way companies or co-investments with them. direct investment opportunities are few that can be mutually beneficial – we and far between for minority investors. Q: China became the most acquisitive evaluate a prospective opportunity country during 2012 and has been very Q: What is your outlook for M&A activity not as a portfolio investment but a active in both domestic consolidation or investment opportunities in the strategic partnership, focusing on as well as overseas acquisitions. Do you mining and metals sector in 2013? areas where CIC can add value as a expect this trend to continue in 2013? A: The macro environment globally remains provider of long-term, patient capital Would China focus more in domestic quite uncertain and volatile — whether it As a minority investor, conducting consolidation (structural adjustments in is the fear of the fiscal cliff in the US, or upfront, robust due diligence is key the industry) vs. acquisitions abroad? the unresolved Eurozone crisis. These to ensuring that we team up with A: The urbanization and demographic are symptoms of fundamental issues a strong operational partner. With a trends in China suggest that the that have yet to be fully resolved. And long-term perspective, we can ride out strategic needs for resources will these fundamental issues are expected the volatility of a sector if we make the continue unabated. In general, given to continue to impact the global right investment with the right partner. the terrain in China, it is often more economy, resulting in an uncertain Q: How would you compare today’s difficult and therefore expensive to investment environment. investment climate vs. 2009 (when extract in China, and the quality of the Again, it is increasingly mission-critical you invested in Teck Resources) in the commodities may not be as high as to “do your homework” upfront. While mining and metals sector? Would you those available abroad. As such, I expect you may come across opportunities pursue opportunities independent of China will continue to be quite active in available at an attractive valuation in CIC’s investee companies in this sector? conducting both overseas acquisitions a volatile environment, more in-depth as well as domestic consolidation. due diligence is often required. The A: Opportunities to invest in similar high-quality, large-scale assets in the Q: It was reported in Wall Street Journal uncertain global economy, coupled by developed countries as a minority (“China’s CIC Makes Investing Shift”, a capital-constrained environment, will investor are few and far between today 19 September 2012) that CIC is making likely result in more M&A opportunities. (compared with 2009 when CIC invested an investment shift to take a more The question is whether buyers would in Teck Resources, for example). Most active role in its investments overseas have the courage to do the deals. of the “low hanging fruit” is gone or by co-investing with other private about to be snapped up in this sector so equity funds. What are the implications there is a scarcity factor for large-scale, of such an investment shift, if any, for high-quality assets. Unlike 2009 (the prospective investments by CIC going forward? Mergers, acquisitions and capital raising in mining and metals 11
  12. 12. SpotlightThe rise of a new class of investorA key characteristic of 2012 deal activity was natural resources has been making the headlines in recent years. However, the growth in the share of investment by such buyers,the increasing role of state-backed and financial during a slower year for M&A globally and the latest commodityinvestors in funding the growth of the mining cycle downturn, may be attributed to the following industryand metals industry through M&A. developments:The mantra across the mining and metals sector over the last • The contraction of traditional funding sources.decade has been growth first, growth second and growth third. • Introspective behaviors of the large-cap producers, reducingAs a result, capital has been consumed in eye-watering volumes; their focus on cross-border M&A.initially debt-fueled and driving scale and consolidation, followedby commissioned mega-projects that have strained balance sheets • Greater focus by mining and metals companies on financialand questioned commitment to shareholder returns. returns and return on capital employed, rendering them less acquisitive on a relative basis.Traditional capital providers have reduced their exposure tothe sector, and, as a result, a funding gap has opened that • An “outward” focus by SOEs. State entities, as mandated byincreasingly seems to be filled by a new class of investor. their government owners, are increasingly looking overseas forThese investors tend to operate in the gray area between M&A both investments in mineral resources and expansion of theirand finance, often driving much needed capital into the sector own operating capabilities.through complex and innovative M&A structures. • The perceived value gap between management and market valuations. Strategic buyers, particularly state-backed and Investor categories: commodity traders, may have better visibility over the real • State-backed acquirers • Commodity traders long-term demand situation in their respective markets. This (e.g., SOEs and Japanese • Acquirers from other potentially enables them to compete in the gap between the Trading Houses (JTHs)) sectors such as automotive, value placed on the business or project by the owners and the • Financial investors technology, fertilizer and value attributed by the market. (e.g., sovereign wealth utility companies, and • Counter-cyclical or through-cycle investment. Chinese funds (SWFs), private industrial conglomerates buying of assets and commodities tends to be counter-cyclical, capital, hedge funds and as was demonstrated by a surge in outbound M&A after real estate holdings) the financial crisis of 2008. Chinese investors tend to haveOur analysis shows that while industry-to-industry M&A long-term investment horizons and buy at what they perceiveunsurprisingly dominated deal activity in 2012, the share of deal to be bottom of the cycle to stockpile or secure future supplyvalue by “non-traditional” acquirers has grown year-on-year to at lower prices, at a time when other competitors may lack theaccount for 31% of total deal value, compared with just 21% in capital or shareholder support to make acquisitions.2011. State-backed and financial investors account for 69% and • Price volatility. Price volatility promotes the need to lock in raw15% of this proportion, respectively. material supply at stable or predictable prices. Furthermore,Furthermore, 88% of outbound deal value by this group reflects strategic buyers may be looking to secure positions that givecross border acquisitions by Asian buyers (predominantly them greater influence over pricing through market share.from China, but also from Japan, South Korea and Singapore).This may not come as a surprise: Chinese investment in globalShare of deal value by acquirer (2011 and 2012) Share of “non-traditional” deals by acquirer (2012)2012 Volume2011 Value 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Industry acquirers Financial investors State-backed acquirers Financial investors State-backed acquirers Commodity traders Other sectors Commodity traders Other sectors Other Other12 Mergers, acquisitions and capital raising in mining and metals
  13. 13. “The funding gap is being filled by private investors and SOEs who may not be dislodged from their newfound positions once the cautionary investment environment recedes and traditional investors return to the sector.” Mike Elliott Global Mining & Metals Leader Ernst & Young, AustraliaThe buyers in 2012 However, a closer look at some of the major SOE acquirers in 2012 reveals a different picture: the ultimate objective may notThere are subtle but important differences between the various have changed, but their broader strategic goals are transforming.buyer groups — different motivations, different approaches to SOEs today are pursuing internationalization, independence,deal making, and different acquisition techniques. We look here at integration, commerciality and global competitiveness. Theysome of the groups that have been prominent buyers this year. consider themselves the global mining and metals companiesStake acquired by share of deal volume (2012) of the future. Like publicly-listed mining companies, they have to compete with other SOEs for assets and for access to stateState-backed acquirers funding, and must demonstrate profitability and return on investment. Financial investors As a result, SOEs are increasingly commercially-focused, Commodity traders aiming to: Other sector acquirers • Buy at a price that reflects shareholders’ best interests (which 0% 20% 40% 60% 80% 100% includes knowing when to walk away) Minority stake Controlling stake • Use investments to educate local management on best practiceTarget level by share of deal volume (2012) and transfer knowledge and skills to the domestic workforce • Invest in more than offtake — SOEs are learning fromState-backed acquirers early mistakes, with stated intentions of investing in local stakeholders, knowledge and social development Financial investors • Operate as more than import/export vehicles by building their Commodity traders own operating capability and resource base Other sector acquirers • Integrate and expand along the value chain — internationally (via 0% 20% 40% 60% 80% 100% a global footprint), vertically (through raw materials supply), Company level Asset level and laterally (through business diversification — mining through to financing and trading) SOEs — the global miners of the future? Despite these intentions, there is often a lack of agility due to At face value, state-backed investors are commonly motivated by drawn out regulatory processes. Timing of a deal in a volatile the need to secure a stable, long-term supply of raw materials, market is critical: what looks like an attractive investment at technology or production capacity for national benefit. Typically, the point of initial offer may look very different a year later. SOEs from high consuming nations such as China, Japan and There is concern by vendors that doing a deal subject to SOE South Korea are tasked with securing minerals (e.g. iron ore or regulatory approval has provided the acquirer with a free option uranium) either through offtake or equity ownership to supply to renegotiate the deal if commodity prices fall. The protracted, national demand (e.g., for steel or power). ongoing negotiations for the acquisition of Sundance Resources SOEs, particularly from China, have typically been perceived as a by Hanlong (Africa) Mining Investment saw Sundance accept a common group — “China, Inc” — with single purpose, bottomless revised offer in August. financial backing, and the unquestioning patronage of an all- powerful shareholder. Some well-publicized misadventures in outbound M&A have done little to dispel this perception. Mergers, acquisitions and capital raising in mining and metals 13
  14. 14. “The Japanese trading houses will be looking to return investment to the sector, which will contribute to an expected uptick in M&A in 2013.” Kunihiko Taniyama Japan Mining and Metals Transactions Leader Ernst & Young, JapanThe deal has been subject to delay in receiving regulatory SWFs have increased their investment activity, driven by aapproval, leading to a reduced offer price that reflected “the confident view about the long term fundamentals for the sectorchange in financial markets since the original agreement was and attractive asset prices in the broad absence of traditionalstruck in October 2011”2. Some SOEs are attempting to address buyers. Temasek of Singapore, for example, has stakes inthis by making approaches when state support for the deal has Turquoise Hill, Inmet Mining and Mosaic. However, there is alsolargely already been secured. growing evidence of the use of specialist funds, such as a reportedActivity by Japanese trading houses was relatively muted in $500m fund set up in Australia, co-managed by an Australian2012. We expect an increase in activity as many set out their new fund and the local arm of a global investment bank5.multiyear investment cycles in 2013, looking to Asian customers Private capital also stepped in to fill the funding gap faced byfor demand, and international markets and partners for supply. juniors in 2012. US-based investment fund manager Luxor Capital made a cornerstone, controlling investment in gold juniorFinancial investors taking minority stakes Crocodile Gold, with a view to exiting via a future refloating ofIn 2012, financial investors (such as private capital, investment its shares in the public market — at a higher price6. We expectfunds, SWFs and real estate holding companies) were an increase in activity by private equity in 2013 as firmspredominantly looking to secure toehold positions in listed opportunistically acquire assets that present the prospect ofmining and metals companies in order to generate investment relatively quick returns as commodity prices begin to recover.returns. Nearly 80% of deals by this group were for minority However, without some visibility over near-term future returns, it(non-controlling) stakes at the company level, with average stake is difficult for traditional private equity to manage their risk of exitsizes of 12%. Gold, coal and copper were the most-targeted in three to five years.commodities. The value and share of investments by this group Some high-profile private finance acquisitions this year metactually declined year-on-year to $4.8b (5%) from $10.4b (6%), with contention and turned hostile. The hostile joint bid forperhaps counter-intuitively given that mid-2012 would seem to Botswana-focused copper miner Discovery Metals by Chineseindicate the bottom of the cycle. This may be a reflection of seller private equity firm Cathay Fortune and investment fund China-reluctance, and also an element of risk aversion among investors Africa Development Fund was one such example. Discoveryamid price volatility in key commodities. Metals’ directors advised shareholders to vote against an offerInvestors in this group were varied in form and geographically they deemed “neither fair nor reasonable”7. The bid has nowwidespread, including Weather Investments II, the investment lapsed. More generally, such hostility perhaps reflects a broadervehicle of prominent Egyptian investor Naguib Sawiris, which perception by sellers that financial investors are looking to exploitacquired Canadian gold producer La Mancha Resources the current weakness in valuations, and bring little technical orfor $494m, at a 55.6% premium to the reference price3. industry expertise to the table. Financial investors argue that theirThe acquisition of close to a 5% stake in Polyus Gold by interests are aligned with those of the shareholders: maximizingChengdong Investment Corporation, a subsidiary of CIC per share shareholder wealth, which means ensuring thatInternational Co., Ltd., signaled the first major foray (albeit via a projects grow and are successfully delivered. Interchina Resourcesminority stake) into one of Russia’s strategic sectors — perhaps Holdings addressed its own lack of industry experience bythe beginnings of future inbound investment into Russia. CIC has entering the sector via a joint venture with a Chinese investmentreportedly set aside $1b for Russia-China co-investments via the fund experienced in the operational and technical aspects of theRussian Direct Investment Fund4. mining industry8.2 “Sundance accepts revised Hanlong offer of 45¢ a share,” Sundance Resources regulatory 5 “China’s top fund changing strategy,” Canberra Times, 27 July 2012, via Factiva.announcement, 24 August 2012. 6 “Luxor Capital Group issues open letter to shareholders of Crocodile Gold”, Luxor Capital Group3 “La Mancha reaches definitive agreement,” La Mancha Resources investor press release, press release, 16 February 2012.13 July 2012. 7 “DML Board recommends shareholders reject takeover offer,” Discovery Metals ASX4 “Sale of shares and GDRs,” Polyus Gold International press release, 30 April 2012; “The Russian announcement, 23 November 2012.Direct Investment Fund (RDIF, 60%) and China Investment Corporation,” WPS: Banking and Stock 8 “Discloseable Transaction,” Interchina Holdings Company regulatory announcement,Exchange, 13 June 2012, via Factiva. 2 May 2011.14 Mergers, acquisitions and capital raising in mining and metals
  15. 15. Commodity traders — more than toe-dipping What does this mean for the industry?Commodity traders have traditionally secured supply through We expect to see a continued and growing role for strategic andofftake and sourcing agreements. However, the model is changing, financial buyers in the years ahead. Many of the characteristicswith traders seeking greater integration and operational influence that have driven or facilitated this growth in 2012 are likely tothrough direct ownership of producing assets for commercial long- continue in 2013, not least the overarching need to secure long-term benefit. Glencore International is setting the bar in respect of term sources of mineral supply.integration, not least through its merger with Xstrata that will see These types of deals are natural and not new to the sector.a significant share of its business made up of controlled industrial The real question is whether such deals would have beenassets supplying commodities for its marketing activities. consummated had traditional debt or equity capital been availableTrafigura’s increase to 100% of its holding in Iberian Minerals to the host investee. On a case-by-case basis it is difficult to judge;this year represented its own efforts to build strategic holdings but what is clear is that these types of investment will only grow inin mining assets to complement its trading activities — building a popularity if capital markets continue to be constrained in 2013.“standalone mining concern”9 to improve market access. Sustained price volatility is likely to drive the continued pursuitCommodity traders accounted for only a small proportion of of vertical integration by metals companies via direct equitydeal value by “external” acquirers at $1.1b (1%), compared with holdings in mining companies to secure supply and manage$7.3b (4%) in 2011. Iron ore, copper and coal were the most costs. An integrated steel and mining business is likely to betargeted commodities, with traders preferring to make outbound more bankable and command higher investor confidenceinvestments via the relatively lower-risk acquisition of minority because of its potential for relatively higher margins, lowerstakes in listed Australian and Canadian juniors. Noble Group volatility of earnings, lower effective tax outflow and stability ofentered into a proposed strategic agreement with Australian overall cash flows. However, Ernst & Young research has revealedjunior Aspire Mining in early 2013, which could see a series that vertical integration by steel into mining also brings in the risksof debt- and equity-funded initiatives ultimately designed to of the mining business and may not always have a positive impactdeliver port and rail solutions for the Ovoot coking coal project in on enterprise value10. Alternatives to legally owning miningMongolia. businesses may be explored, such as commodity price hedging“Other-sector” investors — managing volatility and long-term supply contracts for security, or capping the level of shareholdings in mining businesses.Price and supply volatility drove integration deals by acquirersfrom other industries, just as we have seen in the steel industry. As the ambitions of state-backed entities become increasinglyCoal, rare earths, lithium, iron ore and copper were targeted, with international and independent, competition for quality projectsbuyers from the power, automotive, chemicals and renewable will intensify. Junior companies are, through lack of choice,energy sectors, among others, acquiring stakes through company becoming progressively more innovative in their pursuit of(rather than asset-level) takeovers. funding. With this may come higher value expectations and increased confidence in the negotiation of investment terms;The strategic investment and offtake agreement between owners of quality projects will be reluctant to sell if competitionNorwegian fertilizer distributor Yara International and North is high. This will be matched by increasing sophistication on theAmerican IC Potash was one such example. Yara sought upstream part of state-backed investors as they learn to transact across theexposure to mitigate the financial impact of being structurally borders of the global mining and metals industry.short in its value chain. State-backed South Korean energycompany KEPCO acquired a strategic 14% stake, including a futureofftake provision, in Canada’s Strathmore Minerals to securesupply for South Korea’s nuclear power industry.9 “Developing new production sources and diverse income streams,” Trafigura, http://www. 10 “Global steel 2013: a new world, a new strategy”, Ernst & Young, January 2013,trafigura.com/investments/exploration-and-mining-group/exploration-and-mining-group-case/ www.ey.com/miningandmetals. Mergers, acquisitions and capital raising in mining and metals 15
  16. 16. Mergers & Commodity analysis acquisitions Country analysis16 Mergers, acquisitions and capital raising in mining and metals
  17. 17. Global macro-economic uncertainties took center stage in the world’s largest titanium dioxide producer, Richards Bayin 2012, creating volatility in the equity and commodity Minerals (RBM), by acquiring BHP Billiton’s divested stake, ismarkets. This severely hampered M&A activity as capital one such example.became constrained and greater uncertainty found its A few large deals focused on geographical expansion were alsoway into deal valuations. completed, involving acquisitions of assets in traditional (low risk)The decline in commodity prices exposed margins to rampant mining jurisdictions. Among the other mega deals, downstreamindustry-wide cost inflation. It is estimated that the industry businesses and Asian sovereign investors acquired assetsexperienced cost inflation of between 10% and 15% in 2011, overseas to secure long term supply of raw materials.with overall cost inflation averaging roughly 5%–7% in the last Volume and value of deals by size (2003–2012)10 years11. Furthermore, cost overruns at upcoming capitalprojects, running into billions in some cases, have become 250 1,200commonplace. 200 1,000 800As a consequence, companies shifted gear from “growth for Value ($b) 150 Volume 600growth’s sake“ to “capital optimization“ during 2012, beginning 100 400with a review of existing portfolios. With low cost, long life assets 50 200(tier-one) the priority, investments in massive capital projects were 0 0revisited (e.g., BHP Billiton’s Olympic Dam), non-core assets were 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012earmarked for divestment (e.g., Rio Tinto’s Diamonds business) <$200m Between $200m and $1b >$1b Volumeand M&A activity slowed. Share of mega deal value by M&A theme (2011 and 2012)Major $10b-plus deals have remained elusive since the GFC,with the exception of BHP Billiton’s $11.8b acquisition ofoil and gas company, Petrohawk Energy, in 2011 — such 2012transformational deals gave way to low risk and strategic M&A in 20112012. However, this could change in 2013, with the closing ofthe Glencore International-Xstrata merger and Freeport-McMoRan 0% 20% 40% 60% 80% 100%Copper & Gold’s proposed oil and gas foray12.Non-core asset divestitures gathered pace in the second half of2012, as companies pushed to unlock capital. Only the largestplayers were in a position to capture the “once-in-a-decade”buying opportunities. Rio Tinto’s move to double its interestVolume and value of deals (2003–2012) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2011–2012 growth Volume 475 596 564 701 903 919 1,047 1,123 1,008 941 -7% Value ($m) 46,182 26,350 65,430 175,713 210,848 126,884 60,035 113,706 162,439 104,014 -36% Average value ($m) 97 44 116 251 233 138 57 101 161 111 -31% Median value ($m) 4.4 3.1 4.8 6.2 7.2 6.0 3.2 5.2 5.6 5.0 -12%11 “Cost inflation is major theme for metals production: Deutshe Bank,” CommodityOnline, 16 April 2012.12 “Freeport-McMoRan Copper & Gold Inc. to Acquire Plains Exploration & Production Companyand McMoRan Exploration Co. In Transactions Totaling $20 Billion, Creating a Premier U.S. BasedNatural Resource Company,” Freeport-McMoRan Copper & Gold news release,http://www.fcx.com/ir/news_releases.htm, 5 December 2012. Mergers, acquisitions and capital raising in mining and metals 17
  18. 18. Mega deals (2012)Rank Value Type Target Name Target Target Acquirer Acquirer Country Acquirer Share (%) ($m) Country commodity commodity 1 9,432 Domestic Sumitomo Metal Japan Steel Nippon Steel Japan Steel 100.0 Industries 2 5,200 Cross border De Beers South Africa Diamonds Anglo American UK Diversified 40.0 3 3,735 Cross border Inoxum Germany Steel Outokumpu Finland Steel 100.0 4 3,344 Cross border Quadra FNX Mining Canada Copper KGHM Polska Miedz Poland Copper 100.0 5 3,309 Cross border Roy Hill Holdings Australia Iron ore Posco; STX Corp; Marubeni South Korea; Japan Steel; Trading 25.0 company 6 2,900 Domestic/ Anglo American Sur Chile Copper Codelco; Mitsui Chile; Japan Copper 29.5 Cross border 7 2,823 Cross border Usiminas Brazil Steel The Techint Group Argentina Steel 27.7 8 2,345 Cross border European Goldfields Greece Gold Eldorado Gold Canada Gold 100.0 9 2,299 Domestic Aston Resources Australia Coal Whitehaven Coal Australia Coal 100.0 10 1,910 Cross border Richards Bay South Africa Titanium Rio Tinto UK Diversified 37.0 Minerals 11 1,521 Cross border Gloucester Coal Australia Coal Yankuang Group China Coal 100.0 12 1,500 Cross border Tonkolili Iron Ore Sierra Leone Iron ore Shandong Iron & Steel Group China Steel 25.0 13 1,483 Cross border Minefinders Mexico Silver/lead/ Pan American Silver Canada Silver/lead/zinc 100.0 zinc 14 1,411 Cross border Kazzinc Kazakhstan Zinc Glencore International Switzerland Trading company 18.9 15 1,335 Cross border Exxaro’s mineral Australia Titanium Tronox US Titanium 100.0 sands operation 16 1,288 Cross border Neo Material Canada Rare earths/ Molycorp US Rare earths/ 100.0 Technologies lithium lithium 17 1,283 Cross border Anvil Mining Democratic Copper China Minmetals Corporation China Trading company 100.0 Republic of Congo 18 1,271 Cross border Extract Resources Namibia Uranium China Guangdong Nuclear China Power and 42.7 Power Holding utilities 19 1,250 Cross border First Quantum Democratic Copper Eurasian Natural Resources UK Diversified 100.0 Mineral’s residual Republic of assets Congo 20 1,201 Domestic Laiwu Steel China Steel Jinan Iron & Steel China Steel 100.0 21 1,172 Domestic Yima Coal Industry China Coal Henan Dayou Energy China Coal 100.0 Group — coal assets 22 1,128 Cross border BASF’s fertilizer Belgium Fertilizer MKHK YevroKhim Russia Potash 100.0 plant (EuroChem) phosphate 23 1,037 Domestic Geotransgaz Russia Oil and gas AK Alrosa Russia Diamonds 90.0 and Urengoi Gas Company 24 1,034 Domestic Eramet France Magnesium FSI France Financial 25.7 investor 25 1,012 Cross border Grande Cache Coal Canada Coal Winsway Coking Coal China; Japan Coal; Trading 100.0 Holdings; Marubeni house 26 1,009 Cross border Kalahari Minerals Namibia Uranium China Guangdong Nuclear China Power and 100.0 Power utilities 27 1,000 Domestic Bumi Indonesia Coal Borneo Lumbung Energi Indonesia Coal 23.818 Mergers, acquisitions and capital raising in mining and metals
  19. 19. Two main themes dominated M&A across the sector in 2012: Another emerging trend in 2012 was the increase in the number1) Low risk M&A of deals done for minority stakes rather than full-takeovers, which were very much the domain of the debt-financed This type of deal focused on domestic consolidation for consolidation phase that took place between 2005 and early synergies and pooled resources, in response to cost inflation 2008. Consequently, these minority stake acquisitions and fund raising difficulties. Quite often, low risk M&A increased options for juniors, be it exit through an outright sale, transactions were pursued to achieve synergies in shared or funding via a strategic investment that lends confidence facilities, infrastructure, blasting etc. — for instance, the merger to a project and enables future financing to be arranged. of Australian coal producers, Whitehaven Coal and Aston This trend is likely to continue as financing options remain Resources. Alternatively, low risk deals were aimed at gaining tight and large-cap producers look to recycle capital — both greater control over an asset where a stake was already held, being factors that will drive the pursuit of juniors, as well as such as Anglo American’s acquisition of an additional stake in strategic partners on projects. the world’s largest diamond producer, De Beers. Minority stake acquisitions in junior companies*2) Strategic M&A 5,000 250 Such deals focused on more than just the transaction. The myriad of state-owned and sovereign wealth investors looking 4,000 200 to acquire assets in return for security of supply via offtake are such examples, as in the case of Shandong Iron & Steel’s 3,000 150 Value $m Volume minority stake acquisition in Tonkolili Iron Ore. Strategic M&A 2,000 100 deals provided much needed capital to the target entity in a capital-constrained market, with larger companies acquiring 1,000 50 “toehold” stakes in prospective junior explorers. Such deals 0 0 enabled acquirers to take advantage of equity devaluation in 2010 2011 2012 the junior segment to secure future growth options — a strategy Value $m Volume that HudBay Minerals actively pursued in Peru, for example. Acquirers of minority stakes in junior companies, by share of deal value (2011 and 2012)* 2012 2011 0% 20% 40% 60% 80% 100% State-backed acquirers Financial investors Industry acquirers — Major/Mid-tier Industry acquirers — Junior Other sector acquirers Commodity traders *Represents deals where the stake acquired, and aggregated stake owned after, was less than 50%. Mergers, acquisitions and capital raising in mining and metals 19

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