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Mergers, Acquisitions and Capital Raising in Mining and Metals by Ernst & Young


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  • 1. Mergers, acquisitions and capital raising in mining and metals 2012 trends 2013 outlook When opportunity knocks, who answers?
  • 2. 2 Mergers, acquisitions and capital raising in mining and metals
  • 3. About this study • The data is primarily sourced from • 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. 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 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 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 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 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. 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. 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. 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. 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. “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& 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 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. 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. 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. 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. “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. “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. 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, Mergers, acquisitions and capital raising in mining and metals 15
  • 16. Mergers & Commodity analysis acquisitions Country analysis16 Mergers, acquisitions and capital raising in mining and metals
  • 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 $20 Billion, Creating a Premier U.S. BasedNatural Resource Company,” Freeport-McMoRan Copper & Gold news release,, 5 December 2012. Mergers, acquisitions and capital raising in mining and metals 17
  • 18. Mega deals (2012)Rank Value Type Target Name Target Target Acquirer Acquirer Country Acquirer Share (%) ($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. 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
  • 20. Valuation gap Cross border activityThe changing industry landscape in 2012 made deal execution The growing scarcity of large, quality resources in traditionaldifficult, with some major deals falling through or facing delays mining jurisdictions has led to increasing cross border activity overdue to mismatched expectations on deal valuations and/or funding the years. Companies have increasingly ventured into emergingdifficulties. In one such deal, the privately-owned Tinkler Group and frontier regions to secure metal in the ground, taking onmade a $5.5b takeover bid for Australia’s Whitehaven Coal, greater political risk and even partnering with host governmentsat a time when the latter’s share price had dropped to nearly for social and infrastructure development.three-year lows. However, the bid was eventually abandoned as Share of domestic and cross border deals (2003–2012)deteriorating coal market conditions jeopardized efforts to securefunding for the deal13. 66% 65% 65% 67%Buyer and seller agreement on deal valuation became difficult to 60% 59% 57% 55%achieve in 2012 due to the growing divergence between mining 52% 52%and metals equities and commodity prices. Macro-economic risks 41%weighed heavily on mining and metals equities and commodity 35% 40% 48% 48% 34% 35% 45%prices alike, but this is where the similarities ended. Commodity 43%prices eventually found support from positive long-term 33%fundamentals, especially once the industry’s capital strike took 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012a sizable chunk of planned future supply off the market. On theother hand, mining equities were penalized for challenges and Share of domestic Share of cross borderrisks at the producer-level, particularly escalating operating costs The year 2008 marked a cross-over, with cross-border dealand capital cost overruns. As a result, share prices fully reflected activity overtaking domestic consolidation, following a long periodthe negative impact of commodity price falls, but did not benefit of convergence. However, the GFC reversed this trend dramaticallyfrom an equivalent upside when commodity prices recovered, as companies looked toward domestic consolidation, seekingleaving many sellers searching for large premiums which were synergies and greater financial viability. With such significantdifficult for buyers to swallow. capital flows out of Asia, post the GFC, this trend appears to haveSellers were unwilling to accept lower valuations based on reversed once again, boosting cross-border deal share to moretheir depleted share prices in 2012, on the grounds that this than 50% of deal volume in 2012.unfairly reflected near-term uncertainties, rather than the The risks associated with resource nationalism are no longerlong-term potential of their assets. Consequently, restricted to the frontier and emerging markets alone. Thenegotiations are taking longer and becoming more complex, introduction of the Mineral Resources Rent Tax (MRRT), a carbonresulting in sluggish M&A at best. tax and increases in state royalties in Australia during 2012 is case in point. Infrastructure bottlenecks have also become a concern in mature mining countries, including South Africa and Australia. Furthermore, the mining-led capex boom in traditional mining and metals regions has made cost inflation in these countries far more pronounced compared with general industry levels. Therefore we are beginning to see a more level playing field for M&A across traditional low risk countries and medium risk destinations.13 “Australia’s Tinkler pulls $5.5 billion Whitehaven bid,” Reuters, 24 August 2012; “Tinkler lobslate bid for coal miner,” The Sydney Morning Herald, 14 July 2012.20 Mergers, acquisitions and capital raising in mining and metals
  • 21. Target destinations in cross border deals by risk level (2011 and 2012) Meanwhile, companies held back from making investments in 100% higher risk countries in 2012, suggesting that these deals were 90% 24% 20% possibly harder to justify amid greater shareholder scrutiny 80% on capital allocation. The activity across frontier regions, as a 70% 22% result, tended to be conducted by Chinese SOEs for resourceShare by value 60% 53% security. Frontier markets hold the promise of robust demand 50% from an emerging middle class and are also home to tier-one 40% 30% mineral assets. Competition for the latter has greatly intensified, 54% 20% particularly among BRIC and emerging market players, with 10% 26% strong and steady support from their respective governments. 0% 2011 2012 China and India’s push for bilateral trade agreements with several Low risk Medium risk High risk African nations is testimony to this. The Democratic Republic of Congo (DRC), Sierra Leone and Namibia followed South Africa as top African destinations — primarily targeted by Chinese SOEs for copper, iron ore and uranium, respectively.Value of deals by target region (2007–2012) Market share 2007 2008 2009 2010 2011 2012 Y-o-Y growth (by proceeds $m) Asia Pacific 18,045 29,611 20,505 38,955 38,297 41,055 7% Africa 7,271 1,844 3,285 16,657 20,282 19,940 -2% Latin America 16,147 16,924 12,139 23,957 22,084 13,872 -37% North America 143,369 48,520 15,420 22,200 54,187 13,306 -75% Europe 22,976 26,432 4,608 6,613 3,564 10,424 192% CIS 3,040 3,553 3,836 3,718 23,894 5,418 -77% Middle East - - 242 1,605 131 - Total 210,848 126,884 60,035 113,706 162,439 104,014 -36%Note: numbers may not sum to column totals due to rounding. Mergers, acquisitions and capital raising in mining and metals 21
  • 22. Australia was the top destination for mining and metals M&A Inbound M&A in Latin America was subdued by intense communityin 2012, where M&A targeting Australian assets (inbound and opposition to mining, large capital cost blow outs, water anddomestic) accounted for 13% ($14b) of global deal value, driven energy constraints, and growing protectionism across the increased domestic consolidation, particularly among mid- Increasing demand for raw materials in the Asia-Pacific regioncap coal miners to achieve synergies and mitigate rising costs. drove Asian acquirers overseas to secure supply, with ChinaAlthough subdued by announcements of capital cost blow outs, and Japan, respectively, emerging as the most acquisitiveinbound deal activity in Australia was driven by investments from countries in 2012. Asian SOEs and trading houses dominatedAsian acquirers into coal and iron ore. China was the second this outbound activity. China, Japan and South Korea, together,most targeted destination, due to Government-led domestic accounted for over a third (37% or $39b) of global deal valueconsolidation to centralize control over China’s fragmented coal in 2012.and steel industries. North America was notably quiet in 2012, falling behind EuropeWe are also beginning to see growing interest in many of Europe’s as an acquiring region. The marked decline in the region’sresource-rich countries, driven by growing political support M&A activity can be partly attributed to reduced domestic coalin the region to develop the mining industry in these low-risk consolidation in the US due to difficult market conditions, resultingjurisdictions, including Turkey, Sweden and Spain. Processing from weak demand, depressed prices and the threat of cheapand manufacturing facilities in Germany were targeted by players natural gas. The overall slowdown in Canadian M&A activity waslooking to forward-integrate, with the added benefit of access to characterized by fewer inbound investments from the US, subduedtechnological know-how. domestic consolidation and smaller overseas acquisitions.Value of deals by acquiring region (2007–2012) Market share 2007 2008 2009 2010 2011 2012 Y-o-Y growth (by proceeds $m) Asia Pacific 18,965 46,148 20,197 49,688 58,924 47,903 -19% Europe 90,084 24,074 11,182 7,528 28,438 23,035 -19% North America 77,886 35,057 13,661 35,481 48,964 16,961 -65% Latin America 7,653 8,079 8,181 14,799 3,987 9,287 133% CIS 12,348 13,015 5,248 4,196 19,457 4,131 -79% Africa 3,526 511 1,419 1,480 2,437 2,633 8% Middle East 375 - 72 533 231 53 -77% Unknown 12 - 75 - - 9 Total 210,848 126,884 60,035 113,706 162,439 104,014 -36%Note: numbers may not sum to column totals due to rounding.22 Mergers, acquisitions and capital raising in mining and metals
  • 23. Commodity analysis Power utilities and trading companies were also active acquirers of coal assets to secure supply. Looking ahead, an energy crisisSteel led global deal value as the most targeted commodity, with in India in early 2012 highlights the country’s acute shortagedomestic consolidation being the main theme, characterized of coal, making it a strong contender for overseas coal assetsby strategic moves to protect margins and remain competitive, in competition with China, Japan and South Korea. Gold M&Aincluding access to high growth markets, consolidation and activity has been dominated by domestic consolidation for years,vertical integration. The all-share merger of Japanese steel majors but interestingly witnessed a shift in focus to outbound growth inSumitomo Metal Industries and Nippon Steel was the largest deal 2012. Copper also witnessed a marked increase in cross borderof the year, valued at $9.4b, which was driven by the need to acquisitions, driven by the need for resource security amidremain competitive and achieve cost saving synergies, as well as growing competition for scarce, quality gain leverage over raw material suppliers14. Vertical integration was the key driver for deals targeting rareCoal deal activity was also largely driven by domestic earths and lithium, as well as energy-and-steel-making rawconsolidation this past year in the Asia-Pacific, compared with materials. Asian acquirers actively pursued uranium and iron ore2011 when the majority of this activity took place in the US. assets overseas to secure their long term supply chains.Value of deals by target commodity ($b) (2012) Volume of deals by target commodity (2012) Steel 21.4 Gold 339 Coal 17.9 Coal 101 Gold 14.2 Copper 78 Copper 13.4 Iron ore 58 Iron ore 7.3 Silver/lead/zinc 49 Diamonds 5.3 Mineral exploration 47 Silver/lead/zinc 4.0 Uranium 33 Uranium 3.9 Steel 30 Titanium 3.6 Nickel 26Rare earths/lithium 2.3 Rare earths/lithium 20 Other* 10.6 Other* 142*Other: includes potash/phosphate, nickel, tantalum, vanadium, aluminum, nickel, potash, *Other: include potash/phosphate, nickel, tantalum, vanadium, aluminium, nickel, potash, diamond,diamonds, limestone, PGMs, tungsten, chromite, molybdenum, graphite, tin, silica, gypsum, limestone, PGMs, tungsten, chromite, molybdenum, graphite, tin, silica, gypsum, molybdenum,molybdenum, magnesium, niobium etc. magnesium, niobium etc.14 “Nippon Steel & Sumitomo to Push Cost Cuts Amid Competition,” Bloomberg, 1 October 2012 Mergers, acquisitions and capital raising in mining and metals 23
  • 24. M&A outflows for key nations 0.8 9.1 10.8 0.1 2.2 0.8 0.6 UK Canada Kazakhstan 9.9 Switzerland 0.7 3.0 5.1 1.4 2.3 1.1 China 12.6 Japan US Greece 9.1 2.3 Mexico 1.5 0.4 Sierra Leone 1.8 1.3 Papua Colombia 0.5 New Guinea Democratic 0.6 Republic of Congo 2.3 2.5 2.8 Namibia 0.9 4.5 1.7 0.4 0.5 1.3 7.1 South Africa Australia Argentina 1.5 Chile Domestic (bubble size = deal value) Outbound (bubble size = deal value)24 Mergers, acquisitions and capital raising in mining and metals
  • 25. Capital A changing investment landscape Bonds Syndicated loansraising IPOs Follow on issues Convertible bondsMergers, acquisitions and capital raising in mining and metals 25
  • 26. “For the first year since 2009, we witnessed an overall decline in the amount of capital raised by the industry — a consequence of the complex and evolving capital raising environment that emerged in 2012.” Emily Colborne Strategic Analyst, Mining & Metals Ernst & Young, UKIEconomic uncertainty created volatility and risk aversion Debt and equity proceeds by month (2012)among investors, limiting options for higher risk capital 350 1000raisers, but generating unique opportunities for the 300 900industry’s relative ‘safe bets’ — the investment grade. Equities index movement 250 800The fall in overall capital raised in 2012, to $249b from $340b in Proceeds $b 200 7002011, reflects changing investment appetite: 150 600• Scaling-back of capital outlay (both organic and inorganic) by 100 500 the majors 50 400• A volatility-led structural shift in investor preferences from 0 300 equity to fixed income instruments Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Debt Equity HSBC Global Mining & Steel index• A fundamental, if gradual, shift in the makeup of funding sources, from traditional capital markets to alternative investors and unconventional funding structuresThis change manifested itself in 2012 in the form of recordbond proceeds (largely by investment grade issuers), awithdrawal from the prohibitive commercial loans market, andthe decline of traditional equity funding in the face of punishingmarket valuations.Capital raising by asset class — proceeds (2007–2012) 2007 2008 2009 2010 2011 2012 IPOs 21,400 12,406 2,987 17,948 17,449 1,388 Follow ons 66,802 48,751 73,806 49,705 49,745 25,950 Convertible bonds 12,865 12,238 14,431 5,477 2,365 3,537 Bonds 36,358 38,146 61,016 72,502 83,804 112,539 Loans 110,787 171,691 62,420 183,875 187,059 105,981 Total 248,212 283,232 214,660 329,507 340,422 249,394Note: numbers may not sum to column totals due to rounding.26 Mergers, acquisitions and capital raising in mining and metals
  • 27. A changing investment landscapeThe drivers and implications of this changing environment are best understoodfrom the differing perspectives and interdependent relationships of the industry’svarious players. The major producers Changing behaviors 2012 saw a shift in focus by the major miners, from capital expenditure to The implications of these various capital optimization. Shareholders have become increasingly frustrated by characteristics and drivers are manifold. weakening share prices and lower profitability in the face of huge planned The new investment landscape requires capital spending. As a result, companies have faced pressure to rethink preparation, agility and innovation from all their capital allocation decisions — a pressure that may manifest itself in participants. 2013 as a greater call for dividends. Companies have responded in 2012 with a focus on capital recycling through ongoing appraisal of portfolios, Companies need to ensure the right balance redistribution and diversion of capital from higher cost to higher return between focus on short-term returns and projects, and divestments of non-core assets. We see the industry going investment in longer term growth. The rise through a phase of proving it can provide shareholders with appropriate of long-term counter-cyclical investors, returns before longer term growth options are really back on the agenda. including streaming companies, should see better alignment of funding to the strategic This shift also reflects the possibility that we are entering the next phase objectives of borrowers/issuers. Both parties in the commodity and capital cycle: from a period of price-driven volume are mutually dependent on the success of growth, to a new chapter of price-moderated margin growth. As a result, the project. the investment grade majors are raising capital, predominantly in the bond markets, to take advantage of favorable terms for refinancing, rather than Smaller companies need to be realistic in to fund major acquisitions or capex programs. The focus in 2013 will be on their projections about financing needs. maximizing returns on capital while maintaining credit rating strength. Smaller funding requirements, linked to achievable, phased development targets, The steel producers are more likely to attract investors, and Steel producers faced further tough conditions in 2012, as reduced less likely to result in disappointment of the demand led to squeezed margins and deterioration in credit quality. As a market further down the line. result, steel producers are largely focused on restructuring rather than A thorough understanding of the range growth, through the likely route of asset sales, external fundraising via the of funding structures and sources bond and loan markets, and emergency rights issues in an effort to repair available, and their associated benefits balance sheets. and risks, is required. The mid-tiers and advanced juniors • Are the costs of capital commensurate with the immediate funding need? Companies are typically high yield or unrated, limiting access to the • Are shareholders comfortable with the corporate bond and loans markets, and with little appetite to dilute existing proportion of ownership of your business shareholdings in the equity markets. That said, a number of companies in you are conceding? this group have benefited from the swing to a “stock selective” mindset by institutional investors looking for quality, de-risked investment • On what terms are you locking in offtake opportunities presenting relative visibility over potential near-term returns. of your future supply, and what are the Companies have also exploited limited but expedient opportunities to implications on your long-term growth? access the high yield and US private placement markets. Long-term • What impact will this funding partner or investors are playing an important role, securing toehold positions in the structure have on your ability to secure mid-tiers via equity and offtake financing to help fill the funding gap. other sources of finance? The early-stage explorers Diversifying sources and types of funding will help to spread risk, drive efficiency and limit The capital strike by risk-averse equity investors meant that early exposure or loss of control to any one single stage junior companies were faced with very few options in 2012. “Last party. Building of relationships with the resort” funding options are coming to the fore, often bringing loss of widest range of potential capital providers control over projects or onerous terms. Companies are in survival mode will help to secure the right funding at the once again, with a symptomatic number of companies exhibiting signs right price. of financial distress. Mergers, acquisitions and capital raising in mining and metals 27
  • 28. “Corporate bonds were the story of the year as companies took advantage of unprecedented investor demand for high grade debt to raise record proceeds.” Nicky Crabtree Assistant Director, Mining and Metals Transaction Advisory Services, UKI Bonds The credit environment in Bond volume and proceeds (2000–2012) 2012/2013 120 200 Standard & Poor’s (S&P) has predicted a tough year ahead for 100 mining and metals companies in 2013. Credit rating action Number of Ibond issues 150 ratios swung to the negative over 2012 (more downgrades 80 Proceeds $b than upgrades). However, the downgrades and negative 60 100 outlook largely reflect challenging market conditions for 40 European and Asia-Pacific steel makers and North American 50 coal producers. Many of the major diversified mining 20 producers have been given stable outlooks, underpinned by 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 continued strong cash flows, manageable debt to equity ratios, and in light of the scaling back of planned capital expenditures. Proceeds Number Credit rating quality is a strategic priority in the capital agendas of many mining and metals companies, given the Mining and metals companies raised bond proceeds of $113b attractive pricing and access to capital that the highest-rated in 2012, using bond markets to diversify away from their past issuers have been able to exploit in the bond and commercial reliance on bank debt. Bond issues by the top six diversifieds16 debt markets. ArcelorMittal reportedly said that a downgrade alone, at $42b, comfortably exceeded all previous records. to sub-investment grade status would result in increased The corporate bond market witnessed a virtuous cycle of interest costs of $100m per year15. historically low benchmark rates encouraging demand from A lower commodity price environment can quickly weaken investors for yield, which in turn is reducing borrowing costs for credit ratios and we may see incidences of emergency investment grade issuers. The average coupon on 5–10-year fundraising among leveraged mid-tiers exposed to unexpected US dollar notes issued by investment grade mining and metals price weakness and among steel producers in the face of companies fell to 3.9% (from 4.7% in 2011), masking individual continued challenging market conditions. bond coupons as low as 1% on shorter tenors. In addition to favorable pricing, demand is enabling issuers to refinance existing S&P ratings migration — mining and metals companies (2012) debt and extend maturities. 18 17 Glencore International (rated BBB/stable by S&P) issued its first 16 bond since its 2011 IPO. The €1.25b notes attracted an order book in excess of €5b, allowing material price tightening and a final print at 240bps over mid-swaps. BHP Billiton, which launched its only US dollar issuance early in the year (achieving the lowest 7 6 pricing of all mining issuers on equivalent bonds at 1%), launched 5 4 an AU$1b 3.75% bond due 2017 in October. This represented the 2 largest ever single-tranche Australian dollar bond by an Australian company outside of the banking sector17, with over 80% of the Q1–12 Q2–12 Q3–12 Q4–12 order book comprised of domestic investors. The issue, aimed at Upgrades Downgrades diversifying its investor base and tapping local investor demand, Source: S&P Ratings Direct. Represents foreign long-term issuer credit rating. reportedly attracted an order book of over AU$8b and may trigger a revival of the Australian bond market for both domestic and international borrowers. 15 “ArcelorMittal’s debt cut to junk by S&P on steel weakness,” Bloomberg, 2 August 2012. 16 Anglo American, BHP Billiton, Glencore International, Rio Tinto, Vale and Xstrata ArcelorMittal’s long-term issuer ratings were downgraded by S&P to BB+ from BBB — in 17 “BHP sells first Aussie dollar bonds in more than a decade”, Bloomberg, 9 October 2012. August; by Moody’s to Ba1 from Baa3 in November; and by Fitch to BB+ from BBB — in December.28 Mergers, acquisitions and capital raising in mining and metals
  • 29. The high yield market was a more fickle play, heavily influenced Coupon ranges on US dollar and Euro bonds by tenor (2012)by macroeconomic news flow as investors frequently shifted 14.0 Investment grade High yieldbetween “risk on” and “risk off” trading periods. The chart 12.0below illustrates a clear correlation between market volatility(as represented by the CBOE Volatility Index) and the timing of 10.0 9.8high yield bond issuance. 8.0 8.2Preparation and market timing proved critical, as evidenced by 6.0 4.8 5.0Hudbay Minerals, which elected to postpone a high yield bond 4.0 2.8issue in July due to challenging market conditions, patiently 2.0 1.7holding out for a return in market sentiment. The company 0reissued in September with an upsized issue of $500m maturing <3yr 3–5yr 5–10yr 10–30yr 3–5yr 5–10yrin 2020. High Low AverageHigh yield issues accounted for just 17% of total bond proceeds lower borrowing rates compared with the domestic market. Thein 2012, compared with 24% in 2011, while average spreads issues were met with strong demand, interestingly from Latinon high yield debt (the premium investors demanded above the American investors with significant funds held overseas. Codelco’sgovernment benchmark rate) widened by some 200bps compared bonds made history with the reportedly lowest ever coupon bywith 2011. a Latin American issuer on its 10-year and 30-year notes at 3%2012 saw an increase in the share of bond proceeds raised by (T+165bps) and 4.25% (T+180bps), respectively, raised to fundemerging market companies. Latin American issuers — notably the company’s investment program.Codelco and Vale — issued US dollar bonds to take advantage ofHigh yield bonds (volume of issue, 2011–2012) 10 50 8 40 CBOE Volatility indexNumber of bonds 6 30 4 20 2 10 0 0 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 HY bonds CBOE Volatility index Mergers, acquisitions and capital raising in mining and metals 29
  • 30. Syndicated loansLoan volume and proceeds (2000–2012) Primary use of proceeds, by share of proceeds (2012) 200 350 $59b 300 150 $25b 250 Number of loansProceeds $b $12b 200 100 150 $10b 100 $8b 50 50 $5b 0 0 Debtor in possession $1b 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Proceeds Number2012 witnessed a significant, but not unexpected, fall in loan Of the loans that were closed in 2012, more than half wereproceeds to $106b as banks continue to reduce their exposure “extend and amend” transactions for existing facilities (usually onto riskier assets in order to manage their reserve capital better terms), meaning that relatively little new bank debt flowedrequirements under Basel III. The announcement in January into the sector in the form of project or acquisition finance.2013 of a delay to full implementation of, and changes to, Basel Project finance is increasingly being provided by non-traditionalIII liquidity requirements18 is unlikely to herald a significant lenders such as sovereign wealth funds, equipment providers,change in lending behavior in the year ahead, albeit providing national/development banks, and strategic offtakers, in the formmore time for banks to put required Basel III-compliant systems of pre-finance arrangements. However, among the projects forin place. Many banks are already complying with minimum which traditional bank-syndicated project finance was closed inregulatory capital requirements, but the markets are pushing the year were First Quantum’s Kansanshi copper mine in Zambiafor better standards, demanding considerably higher Core Tier 1 ($1b led by Standard Bank), KGHM Polska’s Sierra Gorda SCMcapital ratios than regulators’ minimum stipulations. As a result, Chilean copper project ($1b with a consortium of Japanese banks)banks remain focused on maintaining strong relationships with and Tharisa Minerals PGM/chrome mine expansion ($132m, ledquality corporates — the highest grade borrowers and “national by HSBC, Absa Capital and Nedbank).champions”. Outside of the syndicated loans market, we are increasingly seeingFor mining and metals companies, the reduced availability of customers providing finance in return for offtake debt inevitably increased borrowing costs with increasingly For example, in August, Paladin Energy secured a $200mrestrictive covenants for all but the largest companies or those prepayment from a major utility for a long-term offtake contractoffering clear opportunities for ancillary business. Average of uranium oxide. The prepayment was secured by the interest in aspreads on leveraged loans widened to 389bps above the Canadian uranium project.benchmark, from 266bps in 2011. This perpetuated a two-tiermarket that has been taking shape for some time now: the largestborrowing large, the rest borrowing little, or, indeed, not at all.Glencore International exemplified the “large” for a second year,with $19b of loans closed for refinancing and in respect of itsmerger with Xstrata.18 “Group of Governors and Heads of Supervision endorses revised liquidity standard for banks,”Bank for International Settlements (BIS) press release, 6 January 2012. Key elements of therevised liquidity standard includes delay of full implementation from 2015 to 2019 (with 60% ofrequirements to be met by 2015), and a change to the qualifying assets 30 Mergers, acquisitions and capital raising in mining and metals
  • 31. IPOsIPO volume and proceeds (2007–2012) Volume of IPOs by primary exchange (2012) 25 300 TSXVenture 39 250 20 Australian 28 Number of IPOs 200 Hong Kong 5Proceeds $b 15 Glencore 150 London AIM 5 10 100 Other 9 5 50 0 0 2007 2008 2009 2010 2011 2012 Proceeds NumberThe value and volume of IPOs in 2012 retreated to their Cross border capital flows saw traditional developed marketslowest levels since at least 2007, and 2009, respectively, with continue to fund exploration in Africa, South America anda year-on-year 40% fall in volume and 81% fall in proceeds Asia-Pacific. Some companies secured the advantage of(even excluding Glencore). Given the period of extreme and cornerstone investors with a vested long-term interest in theunprecedented crisis that 2009 represented, it is difficult to find success of the project. Equipment, power and infrastructurelogic in the indiscriminate nature of the pull-back from equities companies were among those gaining strategic toeholds in coaland the apparently sentiment-driven behavior of the equity and copper projects. In a first of its kind, China Nonferrous Mining,markets in 2012. an Africa-based, Chinese-owned exploration company spun outThe $305m listing of Ivanplats on the Toronto Stock Exchange of China Nonferrous Metal Mining Group, listed in Hong Kong to(TSX) in October was the year’s bright spot and brought late hope raise proceeds for the development of a copper project in Zambia.of a revival in confidence among equity investors and issuers alike. Perhaps this will prove the first of an emerging new method of securing access to Africa’s resources by Chinese investors.IPO volume was made up of small-scale listings by juniorcompanies that opted to raise low proceeds with a view to For the IPO markets to return in 2013, we will need to see relativesecuring a public platform from which to raise future funds. macro-economic stability driving momentum in equity markets.Toronto and Australia were the markets of choice for The signs during 4Q 2012 are promising, and we expect 2013 todomestic IPOs. be a turning point for equity capital raising. Mergers, acquisitions and capital raising in mining and metals 31
  • 32. Follow on issues Convertible bonds Follow on proceeds by company type/size of issue (2008–2012) Convertible bond volume and proceeds (2000–2012) 80 16 120 70 14 100 60 12 Number of loans 80Proceeds $b 50 Proceeds $b 10 40 8 60 30 6 40 20 4 20 10 2 0 0 0 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Metals — all Mining — >$1b Mining — between $200m and $1b Mining – <$200m Proceeds Number Widespread risk aversion culminated in a 48% reduction in The volume of convertible bonds issued in 2012 increased to 113, secondary equity proceeds to $26b, and a reduction in average reflecting a wider pick-up in the global market for convertibles. proceeds raised by junior companies to just $4m (from $6m in But low proceeds, at $3.5b in total (despite a pick-up from $2.4b 2011). Furthermore, around 20% of issues by junior companies in 2011), reflected the shift in function towards junior-end were ultimately priced below their filing range, indicating the financing, in the face of a lack of realistic alternatives for juniors. extent of the challenging funding conditions. Convertibles can present attractive investment options in periods With many companies trading below their net asset values, the of volatility, providing downside protection but also the potential issue of equity is a tough sell to existing shareholders resistant for participation in future upside. The convertibles market is to further dilution of ownership and future earnings per share. also open to unrated issuers — and given the squeeze on other However, many early stage juniors are faced with few alternatives sources of financing, it is perhaps inevitable that juniors are taking and are raising small amounts to cover the costs of staying above advantage of any available demand. water. As a result, we saw a sustained volume of issues, providing However, convertibles are not without their risks and costs. The short-term lifelines. dilution impact is merely delayed (assuming the bond converts), Despite the prevailing market conditions, demand proved resilient while investors are demanding higher coupons to compensate for quality stories, with a number of advanced developers for the additional risk associated with unrated issuance. This is reporting oversubscribed and upsized placings to raise capital for diminishing the traditional advantage that convertibles had over project development and acquisitions. straight bonds in the form of lower pricing to reflect the equity Strategic investors, including the majors, downstream producers, elements. Average coupons on unrated convertible issues, at 9%, financial investors and state representatives, partook in public were on a par with those paid on straight high yield that do not and private placements to secure toehold positions and access hold the risk of future dilution. to supply. Companies also face risk of default if they are unable to meet the principal repayments when the debt matures. A number of companies returned to the markets to this year for that very reason — to raise emergency capital for looming repayments on existing convertibles as market conditions deteriorated. While convertibles have a role to play in an environment of limited choices, we do not expect this class to become an option of first choice in the year ahead. 32 Mergers, acquisitions and capital raising in mining and metals
  • 33. Divestments — are youleaving value on the table?There is a strong appetite fordivestments in the sector,where 43% of mining & metals 1. Regular review portfolio 1. Greater likelihood of closing therespondents of Ernst & Young’s deal 2. Consider all potential buyersrecent Global Corporate Divestment 2. Increased valueStudy revealed that they expect to 3. Tailor the story to each buyer 3. Greater buyer confidenceinitiate divestment plans over the 4. Prepare rigorouslynext two years. 4. Greater control over the process 5. Understand separationThis enthusiasm is tempered by planning 5. Reduced risk of disruption tocaution around the economic business as usualenvironment, and stakeholder and 6. Accelerated divestment processbuyer scrutiny.Globally, 73% of respondentssurveyed (across all sectors) areleaving value on the table whendivesting assets. In our experience,there are five leading principles Key survey findingswhich should be applied by miningand metals companies in order to High performersmaximize value and achieve speed Behind schedule but Ahead of schedule andof execution — even in the current significantly above significantly above pricechallenging environment. price expectations expectations Value expectation 9% 18% 73% are leaving Behind schedule but either near or below price expectations Ahead of schedule but either near or below price expectations money on the 42% 31% table Speed expectation Read more in the Global corporate divestment study. Mergers, acquisitions and capital raising in mining and metals 33
  • 34. Outlook We expect 2012 to represent the peak of the capital strike across the sector, with a more stable economic outlook likely to support an increasingly growth-oriented investment sentiment. During 2013, we expect earnings to strengthen across the mid- and large-cap producers as projects come to market, cost-saving programs begin yielding results and metals prices strengthen; supply of scarce materials. Consequently, those with access to capital and a longer-time investment horizon will seek to invest as prices stabilize at higher levels. Capital recycling, through asset divestitures or partial stake divestments to strategic and financial partners, will remain a key priority for the large producers focused on shareholder thus enabling companies to demonstrate that they can provide returns. Equity stakes sales will increasingly become a capital the returns that shareholders in the sector require. This will, raising option for mining and metals companies, presenting M&A in turn, encourage greater corporate activity that may see the opportunities for those with access to capital. traditional players begin to restore the balance that shifted toward private and state-backed acquirers in 2012. However, a As we enter 2013, the threat of an imminent breakup of the huge resurgence in M&A and capital raising is unlikely. Eurozone has eased, and hopes of economic recovery in the US should go some way to abate uncertainty. A more economically- Long-term demand for the sector will continue to be driven by stable backdrop for the sector’s capital raising decisions in 2013 China and other BRIC and developing nations. The announced could emerge. cutback of capital spending by many will slow the long-term Preserving capital — reshaping the operational and capital base We expect to see companies undertake smarter capital restructuring • We see a mixed outlook for the steel industry, with programs to strengthen balance sheets as they look to strike European steelmakers in particular expected to the balance between achieving long-term growth objectives and continue to idle production in the face of further satisfying a greater demand for returns on capital, in a manner which demand weakness. preserves highly protected credit ratings. The risk of suboptimal • A question mark hangs over the future allocation of capital can have a significant long-lasting impact and of thermal coal due to competition while we may see more capital return to shareholders during 2013, from natural gas and emerging this is unlikely to be at the expense of long-term growth plans. greener initiatives. While operational During the first half of 2013, management across the board will and capital restructuring is part be focused on cost cutting and capital restructuring. However, of the solution, we may also see companies exposed to certain commodities will be put under greater further consolidation, which pressure during 2013: has become a cost cutting mechanism in this market. • Nickel operations are likely to be scaled back further, with the global market expected to remain in surplus. Investing capital — strengthening investment appraisal and transaction execution We anticipate that leaner business models and stronger This combined group may prompt balance sheets will emerge during 2013. This, in turn, will fuel further large-scale consolidation, the sector’s return to growth, driven by the pressure to replace although this is unlikely to play out depleting reserves and maintain production. We predict a stronger fully during 2013. buy-cycle during 2H 2013, underpinned by lower valuations and an Changes in iron ore pricing mechanisms environment where organic growth plans have been damaged by and large trading volumes may lead large cost overruns. commodity traders to enter or increase Large-scale debt-financed M&A will be scarce at the outset of their footprints in the iron ore space, which is 2013 as cash generation is prioritized. We instead expect to see currently dominated by Vale, Rio Tinto and BHP value-adding mid-tier and opportunistic M&A pursued, with a focus Billiton and may present buying opportunities. on deals that reduce overall cash costs and have a low infrastructure We expect to see an increase in Chinese demand for burden. gold assets during 2013 as the economy picks up pace with An expected stabilization in the equity markets would also go some insufficient domestic resources. We expect to see an increase way to realigning buyer and seller expectations, where the valuation in outbound M&A activity, partly driven by a greater appetite gap became a key blocker to successful M&A during 2012. Against a from Chinese mining companies and SOEs looking to grow reserves, more stable economic backdrop, the potential for mining and metals secure supply and increase international footprints; and partly companies to undertake M&A is far greater. driven by demand from Chinese private capital investors seeking strategic stakes for investment purposes. While we hope for economic stabilization, one industry shake-up that is eagerly anticipated is the emergence of the merged Glencore and Xstrata entity, which is expected to complete during Q1 2013.34 Mergers, acquisitions and capital raising in mining and metals
  • 35. “Equity markets are likely to remain challenging in early 2013 and traditional project debt will continue to be available for only the lowest risk, highest quality projects. While we may see increased bond activity amongst the high yield issuers, ultimately the financing game has changed.” Lee Downham Global Mining & Metals Transactions Leader Ernst & Young, UKIOptimizing capital — driving cash and managing the portfolio of assets An industry-wide focus on capital recycling or portfolio • We may see further IPOs result from the continued privatization drive optimization, to reduce costs, release capital or improve in Eastern Europe and the CIS. valuations, is likely to drive spin-outs in a number • While it is early days, China’s transition of leadership may bring a of forms: new focus to China’s SOEs. We could potentially see an increased role • Large cap mining and metals companies for the private sector and Chinese SOEs may look to raise capital for are likely to consider spin-out IPOs state purposes through partial stake sales. While this may not occur in and trade sales for assets that are 2013, it appears to be an inevitable development. considered non-core, underperforming • Advanced juniors and mid-tier mining and metals companies will in terms of return on capital or seen look to reduce costs, prioritize the allocation of capital to the most as ratings dilutive, such as the promising projects, and unlock value from assets that are hidden in a announced spin-off by Gold Fields diversified portfolio. of selected South African assets. Raising capital — assessing future capital requirements and assessing funding sources The 2013 capital raising interest rates may increase demand for higher yielding opportunities environment is expected to be among investors. We witnessed pockets of yield-seeking during 2012 shaped by the continued shift from and short bursts of confidence for the sector, which may translate traditional capital market funding to next year into more sustained periods of demand. Such demand would non-traditional capital providers. As a prove invaluable to the capital-hungry growth engine of the industry, result, capital raising options are becoming the mid-tier developers. broader for mid-tier and advanced junior A slow and steady revival in equity markets is anticipated as confidence mining and metals companies. Non-traditional returns and prices recover on the back of corrective actions taken by capital providers (equipment and infrastructure the industry. A year-on-year improvement in equity markets is expected providers; national and development banks; strategic to enable growth at the mid-tier level supported by smaller-scale offtakers in the form of pre-finance arrangements; royalty funding and supplemented by greater use of funding sources open to companies; streaming companies and specialist funds) are unrated issuers. increasingly replacing traditional project finance. Announced and expected portfolio divestments and asset privatizationsThere is a possibility that we have reached saturation point in the have created a strong pipeline of cross-border IPOs, while theinvestment grade market. The degree of bond raisings by the majors successful listing of Ivanplats during Q4 2012 may pave the way forduring 2012, combined with their scaling back of capital spend, suggests others to need for issuance on the same scale in the year ahead (thoughopportunities to lock-in more favorable pricing are unlikely to beoverlooked). The continued focus by governments on maintaining low Mergers, acquisitions and capital raising in mining and metals 35
  • 36. Commodity analysis Aluminium Coal Copper Gold Iron ore Nickel Potash/Phosphate Silver/Lead/Zinc Steel Uranium36 Mergers, acquisitions and capital raising in mining and metals
  • 37. AluminiumReaders will recall the $4.9b 2. Consolidation of BHP Billiton’s Aluminium and Nickel Aluminiumpurchase of Vale’s aluminium assets commodity groups and sale of its stake in a Guinea alumina 2012 dealby Norsk Hydro as being the standout project characteristicsM&A deal in the sector in 2011. 37 Aluminium 3. Restructuring of Alcoa’s Global Primary Products businessBy comparison, 2012 saw no such including permanent closures and curtailments covering 38 Coalsignificant deals, and in fact very alumina refining and smelting capacity 39 Copperlittle M&A or capital raising activity. 40 Gold Despite increasing concern over systemic oversupply, thereHowever, this lack of M&A activity 41 Iron ore was little incentive for producers to cut smelting capacity duefailed to mask continuing efforts by 42 Nickel to record premiums on offer. Starting the year at c. $112/t, 43 Potash/Phosphatealuminium producers to restructure Asian premiums more than doubled to reach a high of c. $255/t 44 Silver/Lead/Zinctheir portfolios in light of challenging in Q4 2012. Despite record LME (and off-exchange) inventory 45 Steelindustry conditions (despite robust levels, premiums responded to widespread inventory financing 46 Uraniumdemand). There was a definite focus deals and warehouse load-out queues that severely restrictedon operational improvements and availability of physical metal.cost reduction as producers soughtto protect already slim margins by Premiums were all that kept many high cost producers financially viable throughout 2012. Chinese producers also benefited fromlowering their cost curve position as power tariff subsidies and “strategic purchases” by the Statealuminium prices traded within the Reserves end of the cost curve. We expect producers to continue to focus on cost and efficiencyNotable examples of these restructuring initiatives throughout 2013. However, there are two potentialefforts, which led in some cases to catalysts for M&A activity:significant impairments to asset value,included: 1. Non-integrated producers seeking equity participation to secure strategic supplies of bauxite and/or alumina1. Further restructuring of Rio Tinto’s portfolio following the establishment of 2. Efforts to divest non-core assets notably by larger Western Pacific Aluminium (Oct 2011), including producers; in this regard, it will be interesting to observe closure of the Lynemouth smelter which assets flagged for divestment offer sufficient value and strategic fit to attract the non-integrated producers and other potential investorsValue and volume of Aluminium deals 2011 2012Value ($m) 6,535 383Volume 10 6Cross border (%) 40 9 Mergers, acquisitions and capital raising in mining and metals 37
  • 38. CoalCoal Despite significant price volatility, or expand into, metallurgical coal to hedge against thermal coal2012 deal coal remained one of the hottest price falls. However, difficult times also mean coal companies arecharacteristics commodities in 2012 in terms of looking to divest selected assets in order to concentrate on coreAluminium 37 value, with $18.6b of deals either operations. Vale disposed of its thermal coal assets in Colombia toCoal 38 targeting coal or undertaken by coal focus on its coking coal operations. We saw these trends emergeCopper 39 companies. in 2012, and expect them to continue in 2013.Gold 40 However, deal volume was subdued, with Steel companies were less active in their acquisitions of coalIron ore 41 significant price drops and volatility in both for vertical integration in 2012, perhaps reflecting marketNickel 42 metallurgical coal and thermal coal. Most uncertainty or lack of available capital for such acquisitions.Potash/Phosphate 43 of 2012’s mega deals were announced Instead, financial investors were a significant investor group thatSilver/Lead/Zinc 44 in 2011 before the volatility began in emerged, accounting for over 20% of deals by volume.Steel 45 earnest, while the majority of deals with a Overall deal activity is likely to remain subdued in the near future,Uranium 46 value above $500m completed within the with a question mark over the future of thermal coal due to first six months. competition from natural gas and also from emerging greener Recent coal price volatility has been initiatives which are making coal-fired operations increasingly driven by the emergence of low cost less viable. Likewise, uncertainty over future demand, supply and natural gas in the US and a slowdown pricing of metallurgical coal means this market is also likely to in the global steel market. Additionally, remain subdued. rising costs caused the review and closure High costs in the US and Australia in particular will drive investors of many mines around the world. As a overseas to gain greater exposure to Chinese demand via assets result, consolidation has become a cost in Indonesia, Mongolia and potentially Mozambique. However, cutting mechanism. For some companies, permitting and regulatory uncertainties could adversely impact diversification is becoming important as deals targeting these regions. they look to increase their exposure to,Value and volume of coal deals Top 5 coal deals (2012) 2011 2012 Value Type Target Name Target Acquirer Name Acquirer StakeValue ($m) 42,078 18,562 ($m) Country Country (%)Volume 161 107 2,299 Domestic Aston Resources Australia Whitehaven Coal Australia 100.0Cross border (%) 53 46 1,521 Cross border Gloucester Coal Australia Yankuang Group China 100.0 1,172 Domestic Yima Coal Industry China Henan Dayou Energy China 100.0 Group’s coal assets 1,012 Cross border Grande Cache Coal Canada Winsway Coking Coal China; Japan 100.0 Holdings; Marubeni 1,000 Domestic Bumi Indonesia Borneo Lumbung Indonesia 23.8 EnergiValue of deals targeting coal by destination ($m) Value of deals targeting coal by acquirer ($m) Australia 5,981 China 7,218 China 4,883 Australia 3,424 Indonesia 2,273 Japan 1,649 Canada 1,463 US 1,287South Africa 945 Indonesia 1,205 US 890 Thailand 1,035 Kazakhstan 650 Switzerland 864 Other 899 UK 672 Other 62938 Mergers, acquisitions and capital raising in mining and metals
  • 39. CopperSupply concerns remain at the Canada, Australia and Chile led copper deal activity by volume, Copperheart of copper deal-making, with but these mining-friendly jurisdictions fell behind the DRC in 2012 dealdeal volume in 2012 increasing value terms. Traditional copper mining regions have become characteristicsyear-on-year despite persistent increasingly saturated and are dominated by a handful of major 37 Aluminiumglobal macro-economic uncertainties. copper producers. As a result, frontier markets such as the DRC 38 Coal and Mongolia are emerging as prime investment destinations. 39 CopperThe long term fundamentals for We expect the following trends to emerge in 2013: 40 Goldcopper remain positive as urbanization 41 Iron orein emerging markets continues to • Delays to major copper projects bode well for juniors with near- 42 Nickeldrive demand (albeit at a slower pace term production potential, making them attractive takeover 43 Potash/Phosphatein the near term), while the need to targets. 44 Silver/Lead/Zincsecure copper supply is becoming • Backward integration into mines by Japanese and Chinese 45 Steelincreasingly acute. smelters is expected for self-sufficiency in copper concentrate. 46 UraniumEscalating costs, the intensifying risk of • Joint ventures and consolidation among smaller companiescommunity opposition and wage strikes are likely as they struggle to develop projects in the face ofat the producer-level saw most copper escalating costs and subdued commodity prices.equities underperform the copper price • Larger producers will acquire minority stakes in prospectivein 2012. The majority of copper deals juniors and satellite deposits around existing operations.completed in 2012 were announced postthe equity market sell-off in August 2011, • The scarcity of potential copper targets, versus long gestationwhich had lowered company valuations. periods and capital cost inflation, will remain a major issueThis contributed to the decline in overall for pure-play copper producers. We believe widespreaddeal value for 2012, with average deal size diversification into other commodities is unlikely — shareholdersdown 36% year-on-year. manage their own diversification objectives. Instead, we expect companies to push ahead with brownfield expansions, releasing capital via strategic stake sales to manage costs.Value and volume of copper deals Top 5 copper deals (2012) 2011 2012 Value Type Target Name Target Country Acquirer Name Acquirer StakeValue ($m) 20,140 13,535 ($m) Country (%)Volume 88 92 3,344 Cross Quadra FNX Mining Canada KGHM Polska Miedz Poland 100.0Cross border (%) 50 67 border 2,900 Domestic Anglo American Sur Chile Codelco; Mitsui Chile; Japan 29.5 1,283 Cross Anvil Mining Democratic Republic China Minmetals China 100.0 border of Congo Corporation 1,250 Cross First Quantum Minerals’ Democratic Republic Eurasian Natural UK 100.0 border residual assets of Congo Resources 940 Domestic Prosper Well Group China China Daye Non- China 100.0 Ferrous MetalsValue of deals targeting copper by destination ($m) Value of deals targeting copper by acquirer ($m)Democratic Republic 3,563 Poland 3,379 of Congo Canada 3,408 China 2,431 Chile 3,339 UK 2,138 China 1,024 Chile 1,804 Peru 538 Japan 1,454 Mongolia 299 Peru 505 Spain 276 Switzerland 481 Other 926 Other 1,181 Mergers, acquisitions and capital raising in mining and metals 39
  • 40. GoldGold Deal value and volume in 2012 fell companies presented an opportunity for mid-tier producers for 2012 deal year-on-year, despite current market acquisitive growth. The investment market, however, was looking characteristics conditions suggesting a seemingly for capital returns and dividends. Aluminium 37 attractive buying environment. Cross Miners are focusing on challenges around larger development Coal 38 border activity continued to rise as projects both from a timing and cost perspective. The focus Copper 39 companies ventured into frontier is turning to a critical review of asset portfolios with a view to Gold 40 and emerging markets hoping to deferring projects and evaluating whether divestitures and Iron ore 41 find promising new gold deposits, in acquisitions will improve shareholder returns. We expect larger Nickel 42 the face of increasingly challenging gold miners to peruse divestments in the year ahead to optimize Potash/Phosphate 43 economics from declining ore grades risk-adjusted returns, enhance cash flow and ultimately support Silver/Lead/Zinc 44 and higher strip ratios at existing higher dividend yields. Steel 45 gold mines. We expect deal activity to increase during 2013 along with Uranium 46 The disappearance of much of the gold the gold price, with more strategic joint ventures formed as equity premium over the gold price in smaller companies look for ways to minimize project risk and 2012 made companies comparatively increase access to capital. The likelihood of major deals, as seen more attractive than in prior years. in 2010, is lessened, with the large producers more focused on The underperformance was attributed optimization of their existing assets rather than the addition of to the on going decline in cash margins significant capacity. This may change if valuation gaps narrow. In in the gold sector, concerns about addition, we expect to see Chinese mining companies and SOEs capital-cost inflation and an expectation of make overseas acquisitions to grow reserves, secure supply and higher taxes and royalties. Low valuations increase international footprints, and Chinese private capital of smaller producers and development investors acquire strategic stakes for investment purposes.Value and volume of gold deals Top 5 gold deals (2012) 2011 2012 Value Type Target Name Target Acquirer Acquirer StakeValue ($m) 43,270 14,638 ($m) Country Name Country (%) 2,345 Cross border European Goldfields Greece Eldorado Gold Canada 100.0Volume 450 384 777 Cross border Minera Andes Argentina US Gold Canada 100.0Cross border (%) 48 55 750 Domestic AuRico Gold — certain Mexican assets Mexico Minera Frisco Mexico 100.0 597 Domestic Trelawney Mining & Exploration Canada IAMGOLD Canada 100.0 590 Domestic Shandong Tiancheng Mining; China Shandong Gold China 98.5 Shandong Shengda Mining GroupValue of deals targeting gold by destination ($m) Value of deals targeting gold by acquirer ($m) Greece 2,345 Canada 6,750 Canada 1,752 China 2,238 Australia 1,336 Australia 1,657 Argentina 1,204 Mexico 750 China 1,181 South Africa 558 Mexico 1,047 US 527 South Africa 738 Egypt 494 Russia 688 Other 1,233Papua New Guinea 570 Cote d’Ivoire 505 Other 2,84240 Mergers, acquisitions and capital raising in mining and metals
  • 41. Iron oreFalling prices in the second half of Outside of the two largest deals, acquisitions were valued at less Iron ore2012, concerns over demand for than $350m and were predominantly focused at the project-level 2012 dealsteel from China, and demands to facilitate large-scale funding and risk-sharing. characteristicsfrom shareholders to slow activity 37 Aluminium While iron ore prices have recovered in early 2013, there ishave translated into very subdued uncertainty over the sustainability of these gains and over the 38 Coaltransaction activity in 2012 for short- to medium-term outlook for the commodity. Despite this, 39 Copperiron ore. continued growth from emerging markets supports positive 40 Gold 41 Iron oreExcluding the large $3.3b Roy Hill Holdings longer term fundamentals for the sector. In particular, future steel 42 Nickelacquisition, deal value more than halved demand from India, combined with iron ore export restrictions 43 Potash/Phosphatecompared with 2011. from the country, may drive India to seek access to further 44 Silver/Lead/Zinc reserves through M&A activity. We may also see steelmakersThe year’s two largest deals reflected 45 Steel investing in infrastructure development for upcoming iron orecontinued investment by steel companies 46 Uranium projects in frontier markets in return for greater offtake.into iron ore to manage supply and pricerisks. However, there was a clear fall in Emerging regions, such as relatively politically-stable West Africa,such activity compared with previous will continue to be targeted for iron ore, though in most casesyears, reflecting the uncertainty in the these will be seen as long-term new supply over the future of iron ore and Looking ahead, changed pricing mechanisms and large tradinga potential supply glut. The most active volumes may lead commodity traders to enter, or increase theiracquirers of iron ore by volume were footprints in, iron ore, which is presently dominated by Vale, Riofinancial investors, taking mostly minority Tinto and BHP Billiton. Large non-ferrous miners may also seek tostakes in relatively safe destinations such add iron ore to their portfolios for further diversification. This isas Australia and Canada. likely to increase competition for quality iron ore assets.Value and volume of iron ore deals Top 5 iron ore deals (2012) 2011 2012 Value Type Target Name Target Acquirer Name Acquirer StakeValue ($m) 9,095 7,354 ($m) Country Country (%)Volume 77 65 3,309 Cross border Roy Hill Holdings Australia Posco; STX Corp; Marubeni South Korea, 25.0 JapanCross border (%) 56 55 1,500 Cross border Tonkolili Iron Ore Sierra Leone Shandong Iron & China 25.0 Steel Group 318 Domestic Shandong Hualian China Shandong Dacheng China 100.0 Mining Pesticide 318 Cross border Roy Hill Holdings Australia China Steel Corporation Taiwan 2.5 316 Cross border African Iron Limited Republic of Exxaro South Africa - CongoValue of deals targeting iron ore by destination ($m) Value of deals targeting iron ore by acquirer ($m) Australia 4,182 China 2,132 Sierra Leone 1,500 Japan 1,971 China 405 South Korea 1,655Republic of Congo 316 India 335 Liberia 239 Taiwan 318 Canada 193 South Africa 316 India 191 Other 588 Other 289 Mergers, acquisitions and capital raising in mining and metals 41
  • 42. NickelNickel The drastic fall in nickel prices for nickel consumption, contracted by 0.5% during the first half of2012 deal over the first nine months and an 2012, with few drivers in the pipeline to accelerate growth in thecharacteristics uncertain outlook for stainless steel near term. Furthermore, the global nickel market is expected toAluminium 37 led to investor caution in 2012. remain in surplus due to weak demand, a large increase in supplyCoal 38 Accordingly, large-scale investments from major project ramp-ups, and the impact of China’s NPICopper 39 in the nickel sector have taken a refineries coming on-stream to supply the global market.Gold 40 back seat. The slowdown in global demand has prompted large/diversifiedIron ore 41 Australia was the most acquisitive miners to review their nickel operations for the next year.Nickel 42 nation largely on account of domestic Vale plans to close its nickel mine at the Frood site, due toPotash/Phosphate 43 consolidation. China remained an active market volatility, declining metal prices and falling demand forSilver/Lead/Zinc 44 acquirer of nickel in 2012, despite slowing the product. Xstrata has also announced the suspension ofSteel 45 economic growth, securing overseas operations at its Cosmos nickel mine in Western Australia due toUranium 46 supply mainly in Canada. We expect adverse market conditions, including the prolonged nickel price Chinese activity to continue as China weakness and a strong Australian dollar19. looks to lock in nickel assets to supply its The restrictions implemented on Indonesian nickel ore exports in own rising nickel pig iron (NPI) capacity. early 2012 reduced shipments later in the year, a development Over January–October, China imported that could continue well into 2013. Indonesia’s new mining policy 50.6 million tonnes of nickel ore, a rise of includes an average 20% export tax, along with new export quota 35% year-on-year. on 14 minerals, including nickel. These restrictive policies by some However, globally, nickel is expected to nations could be instrumental in the revival of nickel M&A deals remain under pressure in 2013. Global over next few years as countries may try to secure raw material stainless steel demand, the main driver supply of nickel for stainless steel sector.Value and volume of nickel deals Top 5 nickel deals (2012) 2011 2012 Value Type Target Name Target Acquirer Name Acquirer StakeValue ($m) 1,465 433 ($m) Country Country (%)Volume 28 29 86 Cross border Goldbrook Ventures Canada Ji lin Ji En Nickel Industry China 100.0Cross border (%) 29 45 73 Domestic Kagara Mining’s Australia Western Areas Australia 100.0 nickel assets 69 Cross border ENK Turkey DMCI Holdings; D&A Income Philippines; - UK 47 Domestic Magma Metals Australia Panoramic Resources Australia - 26 Cross border Continental Nickel Tanzania IMX Resources Australia 62.8Value of deals targeting nickel by destination ($m) Value of deals targeting nickel by acquirer ($m) Canada 111 Australia 112 Australia 85 China 99 Turkey 69 Philippines 92Philippines 33 Canada 21 Tanzania 26 Switzerland 17 US 10 Vietnam 22 Other 16 Other 19 19 “Sudbury nickel mine stops operations at year’s end due to falling prices,” The Canadian Press, 19 October 2012, via Factiva; “Xstrata Nickel Australasia puts Cosmos on care and maintenance,” Metal Bulletin, 21 September 2012, via Factiva.42 Mergers, acquisitions and capital raising in mining and metals
  • 43. Potash/PhosphateIt has been a tough year for potash. companies used M&A to drive efficiencies and reduce costs through vertical integration. Potash/Delayed negotiations with Chineseand Indian contracts, coupled with Phosphate Consolidation and strengthening of existing market positions 2012 dealan overstocked market, created also drove transaction activity this year. All major transactions characteristicsan unsteady supply and demand made by Canadian or US companies, for example, stayed within 37 Aluminiumenvironment. Not surprisingly, M&A the continent. 38 Coalactivity for 2012 was tinged with an 39 Copper The large number of new investors securing investment andair of caution and many investors 40 Gold strategic stakes in the potash/phosphate industry is striking.focused on long-term strategic 41 Iron oreadvantage ahead of the unclear With industry players confident in the strength of long-term 42 Nickelshort-term market outlook. fundamentals for potash and phosphate, we may see moves to 43 Potash/Phosphate acquire or build on existing stakes to obtain greater control or 44 Silver/Lead/ZincOversupply and weak demand were the ownership of strategic resources. This will be most important forkey market concerns in 2012. Many of 45 Steel Asian and South American markets to secure their own supply,the world’s largest potash and phosphate 46 Uranium but also for North American investors looking to maintain theirproducers found it necessary to curtail stronghold. In the short term, prices are likely to remain flexible asproduction in an effort to reduce existing suppliers attempt to reduce stocks. The settlement of lower valueinventories. Prices have fluctuated contracts between Canpotex and China should reignite globalconsiderably and reports of new projects demand and place Asia and South America in better positionswith more supply coming online down the to negotiate. As demand increases, the downward pressuretrack provided buyers with an incentive on existing reserve volumes may reduce the need to curtailto hold out for the best deals on big production. However, the threat remains of new projects (andpurchases. hence greater supply) coming on board, as investors seek to takeAgainst a wider backdrop of rising advantage of the growing demand.industry costs, several potash/phosphateValue and volume of potash/phosphate deals Top 5 potash/phosphate deals (2012) 2011 2012 Value Type Target Name Target Acquirer Name Acquirer StakeValue ($m) 10,430 3,124 ($m) Country Country (%)Volume 21 23 1,128 Cross border BASF’s fertilizer plant Belgium MKHK YevroKhim (Eurochem) Russia 100.0Cross border (%) 57 65 502 Domestic Qinghai Salt Lake China Qinghai Salt Lake Industry China 31.0 Magnesium 405 Domestic Severneft-Urengoy Russia MKHK YevroKhim (Euro Chem) Russia 100.0 344 Domestic Apatit Russia PhosAgro Russia 26.7 209 Domestic Verkhnekamskaya Russia Eurasian Development Kazakhstan; 38.0 Kaliynaya Kompaniya Bank; Raiffeisenbank; Russia Bank for Development and Foreign Economic Affairs (Vnesheconombank)Value of deals targeting potash/phosphate by destination ($m) Value of deals targeting potash/phosphate by acquirer ($m) Russia 553 Russia 553 US 207 US 150 Brazil 37 Australia 83 Spain 30 Other 120Ethiopia 24Namibia 21 Other 33 Mergers, acquisitions and capital raising in mining and metals 43
  • 44. Silver/Lead/Zinc Struggling supply growth and the Some of the larger deals were driven by silver companies lookingSilver/ to geographically diversify their operations, generate cash flow expected closure of large operationsLead/Zinc in the next couple of years will lead to from producing mines and consolidate into bigger players.2012 dealcharacteristics an increase in prices in the medium Silver is used in industrial applications and also as a financialAluminium 37 term. This deficit in the zinc market investment to hedge against inflation. Interest in silver is expectedCoal 38 will result in increased M&A activity. to increase as monetary loosening by central banks leads toCopper 39 Excluding the year’s two largest deals inflationary concerns.Gold 40 (the $1.5b acquisition of Minefinders By comparison, there were fewer zinc and lead deals as zinc pricesIron ore 41 by Pan American Silver and Glencore remain weak due to lack of demand from China and high inventoryNickel 42 International’s $1.4b deal to buy levels. The outlook for zinc remains strong in the medium termPotash/Phosphate 43 18.9% in Kazzinc), deal activity in the as supply growth will lag demand growth. We expect to see zincSilver/Lead/Zinc 44 silver/zinc/lead sector was characterized smelters backward integrate to secure concentrate supplies.Steel 45 by smaller deals in 2012, with an average Emerging markets such as China and India will continue to driveUranium 46 deal value of about $19m. These deals demand for the two metals. were undertaken to expand asset bases The traditional markets of Mexico, Peru, China and Canada will or unlock value through divestment of continue to attract investment, but increasing competition for non-core assets. Junior explorers made resources in these regions may force investors to look to non- private placements to raise capital for traditional markets as well. advancing exploration-stage projects.Value and volume of silver/lead/zinc deals Top 5 silver/lead/zinc deals (2012) 2011 2012 Value Type Target Name Target Acquirer Name Acquirer StakeValue ($m) 3,718 4,057 ($m) Country Country (%)Volume 72 62 1,483 Cross border Minefinders Mexico Pan American Silver Canada 100.0Cross border (%) 53 60 1,411 Cross border Kazzinc Kazakhstan Glencore International Switzerland 18.9 250 Cross border El Cubo mine; Guadalupe y Mexico Endeavour Silver Canada 100.0 Calvo project 147 Cross border Silvermex Resources Mexico First Majestic Silver Canada 100.0 139 Domestic XingAn IEMR Mining China Chengtun Mining Group China 51.0Value of deals targeting silver/lead/zinc by destination ($m) Value of deals targeting silver/lead/zinc by acquirer ($m) Mexico 1,982 Canada 2,041Kazakhstan 1,411 Switzerland 1,429 China 209 China 225 Australia 90 Australia 86 Poland 68 US 73 Argentina 60 Poland 68 Peru 51 Other 31 Other 8244 Mergers, acquisitions and capital raising in mining and metals
  • 45. SteelMarket and price volatility is motivation for M&A in the steel sector was cost-focused synergies Steeldriving deals in the steel sector as rather than growth. 2012 dealsteelmakers seek to protect margins Raw material price volatility remains a major concern in the characteristicsand remain competitive. 37 Aluminium industry; as a result, steelmakers have continued to integrate raw 38 CoalMarket conditions have remained material mines into their supply chains, allowing them to control 39 Copperchallenging in 2012 as global supply, cost and quality of raw materials. 40 Goldconstruction and automotive demand Gearing in the sector is high — the average of the top 20 41 Iron oreremains weak. European steel demand steelmakers is 88% — which could impact credit ratings. This has 42 Nickelwas weak throughout the year and with resulted in the strategic divestment of assets. 43 Potash/Phosphatepredictions of another 10% decline in Weak economic conditions may also see more steelmakers 44 Silver/Lead/Zincdemand in 2013, several European divesting assets as they seek to arrest deterioration of their 45 Steelsteelmakers continue to idle production. financial positions. ArcelorMittal, for example, intends to divest a 46 UraniumA return to pre-crisis levels of steel $1.2b (15%) stake in its Canadian iron ore operations in 201320.demand in Europe is unlikely in the shortto medium term. However, North American There was significant domestic consolidation in China’s steelsteel demand from the automotive and sector, as the Chinese Government prioritized mergers andenergy sectors is improving, and despite restructuring among high-cost producers in the country’smixed predictions, Chinese steel demand fragmented steel sector. We expect this consolidation to continuecontinues to be strong. as the 12th five year plan aims to have 60% of steel production in the hands of the top 10 steelmakers by 2015.While the volume of deals in 2012 declinedby 22%, deal value in the sector increased The forecast increase in both steel production and demandby 160% compared with 2011. The major in emerging markets will lead to an increase in strategic joint ventures for access to new markets and technological know-how.Value and volume of steel deals Top 5 steel deals (2012) 2011 2012 Value Type Target Name Target Acquirer Name Acquirer StakeValue ($m) 10,582 27,480 ($m) Country Country (%)Volume 60 47 9,432 Domestic Sumitomo Metal Japan Nippon Steel Japan 100.0 IndustriesCross border (%) 45 36 3,735 Cross border Inoxum Germany Outokumpu Finland 100.0 3,309 Cross border Roy Hill Holdings Australia Posco; STX Corp; Marubeni South Korea; 25.0 Japan 2,823 Cross border Usiminas Brazil The Techint Group Argentina 27.7 1,500 Cross border Tonkolili Iron Ore Sierra Shandong Iron & Steel Group China 25.0 LeoneValue of deals targeting steel by destination ($m) Value of deals targeting steel by acquirer ($m) Japan 9,750 Japan 9,790 Germany 4,467 Finland 3,735 Brazil 3,593 Argentina 3,593 China 2,400 China 2,400 US 622 Brazil 632South Africa 437 US 622 India 177 South Africa 437 Other 108 India 138 Other 107 20 “ArcelorMittal agrees to sell a 15% interest in ArcelorMittal Mines Canada for $1.1bln to a Consortium led by POSCO and China Steel Corporation,” ArcelorMittal press release, 2 January 2013. Mergers, acquisitions and capital raising in mining and metals 45
  • 46. UraniumUranium Uncertainty surrounding the restart demand, expiry of the US-Russia HEU supply agreement (due in2012 deal of Japan’s nuclear reactors led to a late 2013/early 2014) and project cutbacks.characteristics year of two halves for uranium M&A. Looking ahead, clarity from Japan over its nuclear policy,Aluminium 37 During the first half of the year, M&A new reactor approvals in China, stated support in advancedCoal 38 activity accelerated as acquirers took countries for nuclear power generation, and clarity on RussianCopper 39 advantage of lower valuations to secure supplies should help to improve investor confidence in the sector.Gold 40 strategic access ahead of expectations Furthermore, against the backdrop of India and Australia enteringIron ore 41 of a rebound in demand following a nuclear fuel supply agreement, the Australian QueenslandNickel 42 Japan’s predicted move to restart its Government’s decision to lift the ban on uranium mining inPotash/Phosphate 43 nuclear reactors. the State unlocks $18b of deposits23. Commercial mining ofSilver/Lead/Zinc 44 uranium has been banned since 1982 (although exploration wasSteel 45 However, delays to the restart created permitted). The decision to allocate mining leases may requireUranium 46 uncertainty, causing the spot uranium additional capital and attract funding through debt and equity price to fall through the $50/lb investments. mark to $41/lb in November21, closing the year at around $43.5/lb22. As a result, In the near term, prevailing uncertainty may drive opportunistic newer projects were canceled, existing deals as acquirers look to take advantage of the disconnect projects reconsidered and deal activity put between supply and demand fundamentals that in turn is leading on the backburner. to lower valuations of companies. Opportunistic buyers are likely to take the form of power companies seeking integration, and The outlook is more promising, however. strategic investors from China, India and Russia, which are all While the uranium market is currently seeking to secure future uranium resources. oversupplied, it is heading toward a supply crunch primarily driven by growingValue and volume of uranium deals Top 5 uranium deals (2012) 2011 2012 Value Type Target Name Target Acquirer Name Acquirer StakeValue ($m) 1,710 3,917 ($m) Country Country (%)Volume 37 43 1,271 Cross border Extract Resources Namibia China Guangdong Nuclear China 42.7Cross border (%) 38 60 Power Holding 1,009 Cross border Kalahari Minerals Namibia China Guangdong Nuclear China 100.0 Power Holding 590 Cross border Hathor Exploration Canada Rio Tinto UK 94.3 430 Cross border BHP Billiton’s Australia Cameco Canada 100.0 Yeelirrie deposit 150 Cross border Mantra Resources Tanzania Uranium One Canada 13.9Value of deals targeting uranium by destination ($m) Value of deals targeting uranium by acquirer ($m) Namibia 2,282 China 2,282 Canada 744 Canada 898Australia 458 UK 590 US 172 Other 89Tanzania 153 Sweden 25 Other 25 21 Uranium Weekly, RBC Capital Markets, 20 November 2012. 22 Uranium Weekly, RBC Capital Markets, 2 January 2013. 23 “Newman lifts uranium ban in bid to tap $18b deposits,” The Australian, 23 October 2012.46 Mergers, acquisitions and capital raising in mining and metals
  • 47. Country analysis Africa Latin America Australia Canada China India Indonesia Japan Russia South Korea United Kingdom United StatesMergers, acquisitions and capital raising in mining and metals 47
  • 48. Africa “In 2012, the African continent attracted investment as traditional mining regions become increasingly saturated and risk differentials began to narrow globally. Increasingly, Africa is being looked to in order to provide mineral supply to meet the world’s future growth.”Michael BosmanMining & MetalsTransactions LeaderErnst & Young, South Africa Africa There was a strong contrast between Capital raising activity in South Africa continued to be scarce the drivers for M&A in South Africa during 2012. Loan proceeds for the year primarily reflect Africa 48 AngloGold Ashanti’s $1b early refinancing, which extended and those for the rest of Africa in Latin America 51 2012. Relatively untapped African existing loan maturities by three years to 2017, and Gold Fields’ Australia 53 nations continued to attract growth- reported $1.5b facility as the company proposes to demerge Canada 54 driven investment for resource its South African KDC and Beatrix mines into a separately listed China 55 security. Conversely, deal activity entity, Sibanye Gold24. However, Petra Diamonds successfully India 57 in South Africa’s mature mining and closed $244m of new debt facilities to finance its expansion Indonesia 58 metals sector largely stemmed from plans, particularly at the Cullinan and Finsch diamond mines. Japan 59 industry reorganization in response The facilities were arranged with FirstRand Bank, Absa Russia 60 to widespread labor unrest, growing Corporate and Investment Banking and the International Finance South Korea 61 resource nationalism, and higher- Corporation. United Kingdom 62 than-inflation wage and energy cost Outlook United States 63 increases, together with a number of Looking ahead, efforts to reduce exposure to South Africa are transactions restructuring previous expected to continue. Gold Fields’ planned spin out is aimed at black economic empowerment (BEE) improving its credit rating, deemed by analysts to be adversely deals during the year. impacted by exposure to South Africa. We expect companies with Although South Africa was the top African a track record of operating in South Africa to be the likely buyers, destination for M&A, we do not believe as political stability in the country must improve before significant this to mark resurgence in investment. new investment returns. This $8.5b of activity was largely the outcome of portfolio optimization by Spotlight on Africa’s frontier nations major mining and metals companies, Africa’s relative wealth of untapped mineral resources continued which prompted decisions to mothball to attract deals for resource security in 2012, despite a high-cost operations, divest non-core contraction of investment from the large-cap producers. This assets and build on existing stakes in key contraction was the outcome of efforts to optimize capital amid assets to achieve the right risk-return increasing shareholder scrutiny. Such scrutiny made it harder balance. Anglo American and Rio Tinto for these companies to justify large investments into higher-risk consolidating their existing stakes in African jurisdictions for a number of reasons, including: De Beers and Richards Bay Minerals, • Continued fiscal instability in Guinea, Zimbabwe, Ivory Coast, respectively, were two such examples. Tanzania and Burkina Faso, with Governments in these Outside of the two largest deals, South countries targeting the mining and metals sector for further African coal assets were actively targeted participation/economic benefit in one form or another. The for M&A, underpinned by a strong year of increase in capital gains tax in Mozambique to effective 32% export earnings owing to the depreciation from 1 January 2013, announced late in December 2012, of the Rand. This helped to offset price falls is an example of increased regulatory uncertainty. (See Risk and cost inflation. Meanwhile, extensive 9 — Sharing the benefits from Ernst & Young’s Business risks social and political unrest during the year in mining and metals report.) deterred new investment in South Africa’s • Concerns around political stability across the continent, platinum and gold sectors. We expect although this risk depends on the level of sophistication of the the ongoing domestic consolidation to mining legislation and the Government’s ability to monitor and continue, together with substantial balance implement legislative changes. sheet restructuring as seen during the last quarter of 2012. 24 “Emerging markets syndicated loans – news in brief,” Euroweek, 13 December 2012, via Factiva.48 Mergers, acquisitions and capital raising in mining and metals
  • 49. • Security issues, as was seen in the DRC in November 2012, with While project finance was scarce across the sector, some frontier rebels seizing a provincial capital in the country, consequently Africa projects attracted bank funds. For example, First Quantum weakening the Government, exacerbating regional tensions, and Minerals signed a $1b financing facility for its Kansanshi copper/ alarming investors. gold project in Zambia to fund planned capital expenditure.Despite these obstacles, Africa will continue to be an attractive And Shanta Gold secured $15m from FBN Bank to fund plantdestination for the large-cap producers as it is home to tier-one construction and mining costs at the New Luika and Singidamineral resources, competition for which is expected to intensify projects in Tanzania, with a further $30m facility announced atin the coming years. Furthermore, mining and metals investment the end of the developing African economies is the key to much-needed There was a strong appetite to acquire DRC-based assets ininfrastructure development in these countries — a prerequisite for the first half of the year. This is unlikely to be an indication ofunlocking the value of the mineral wealth they hold. Many African improved political stability, but rather reflects the low cost scale ofgovernments recognize this need and have shown an inclination assets located in the DRC copper belt. Meanwhile, we witnessedtoward creating an investment environment conducive to foreign a slowdown in exploration in West Africa — a trickle down impactdirect investment (FDI) in the sector. Outside of the traditional of a scale back in investment from the majors on the back ofmining and metals producers, Chinese and Indian investors have softening iron ore prices highlighted by Vale’s announcement toexhibited a higher risk tolerance through willingness to invest put on hold plans for its $5b Simandou project in infrastructure to bring greenfield projects to production andsecure offtake. In 2012, Chinese SOEs were the most active Outlookacquirers in Africa’s frontier markets, leveraging China’s resource- We expect to see a rise in M&A targeting existing African assets,for-infrastructure investment contracts with many African for those with a long-term view of the market. Asian interestgovernments. in Africa’s mineral reserves will gain further impetus from improvements in the rail network that links mining and metalsGlencore International also expanded its footprint in Africa, with a operations with the Africa’s East coast, thereby providing easierparticular focus on securing long-term supply of commodities that access to Asian markets.are expected to head towards a structural supply deficit in themedium to long term, particularly copper, uranium and iron ore. In the longer term further investment is likely to follow fromASX-, TSX- and AIM-listed juniors, as well as financial investors, traditional investors as the impact on the region’s infrastructureshowed keen interest in the same set of commodities, together from the investments made by Chinese SOEs and SWFs filterswith a focus on gold. This nearly doubled Africa’s inbound deal through, translating into future M&A opportunities.volume year-on-year. However, these were largely small deals(<$200m) focused on exploration stage assets, consequentlyalmost halving average deal size to $182m in 2012.Top 10 African deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 5,200 Inbound De Beers South Africa Anglo American UK 40.0 1,910 Inbound Richards Bay Minerals South Africa Rio Tinto UK 37.0 1,500 Inbound Tonkolili Iron Ore Sierra Leone Shandong Iron & Steel Group China 25.0 1,283 Inbound Anvil Mining Democratic Republic China Minmetals Corporation China 100.0 of Congo 1,271 Inbound Extract Resources Namibia China Guangdong Nuclear Power Holding China 42.7 1,250 Inbound First Quantum Minerals’ Democratic Republic Eurasian Natural Resources UK 100.0 residual assets of Congo 1,009 Inbound Kalahari Minerals Namibia China Guangdong Nuclear Power China 100.0 550 Inbound Camrose Resources Democratic Republic Eurasian Natural Resources UK 49.5 of Congo 494 Intra-regional La Mancha Resources Côte d’Ivoire Weather Investments II Egypt 100.0 480 Inbound Samref Overseas Democratic Republic Glencore International Switzerland 24.5 of Congo Mergers, acquisitions and capital raising in mining and metals 49
  • 50. Africa deals overview Africa capital raising by asset class Value ($m) Volume Proceeds ($m) Volume 2011 2012 2011 2012 2011 2012 2011 2012Outbound 426 220 5 2 IPOs - - - - - -Inbound 18,271 17,527 51 92 Follow ons 378 1 6 1Domestic 2,010 2,413 9 17 Convertible bonds - - - - - -Total Africa 20,708 20,160 65 111 Bonds - 745 - 1Global share 13% 21% 7% 13% Loans 3,032 5,707 12 11 Total Africa 3,410 6,453 18 13 Total Global 340,422 249,394 3,150 2,874Value of Africa inbound deals by target commodity ($m) Value of Africa inbound deals by target country ($m)Diamonds 5,202 South Africa 8,503 Copper 3,700 Democratic Republic of Congo 3,013 Uranium 2,436 Namibia 2,329 Titanium 1,910 Sierra Leone 1,505 Iron ore 1,792 Mali 393 Coal 1,143 Tanzania 245 Gold 1,109 Botswana 237 Other 235 Other 59150 Mergers, acquisitions and capital raising in mining and metals
  • 51. Latin America “Latin America offers huge opportunities for the sector, as the region has yet to be subjected to vast exploration. Local and regional regulation and legislations can be challenging to navigate and this, together with sizeable infrastructure needs, has slowed investment to date; but the opportunities are too big to ignore.” Sergio Veloso de Menezes Transaction Leader Ernst & Young, Latin AmericaDespite the strong growth prospects assets25. The acquisition comprised the Dolores mine in Mexico, along with other mines in Peru, Argentina and Bolivia. In addition, Latinin Latin America, the region hasnot been immune to the general US Gold of Canada merged with Minera Andes of Argentina, Americaslowdown in M&A activity. In addition, bringing together producing mines and exploration projects in the 48 Africasome countries in Latin America, US, Mexico and Argentina. 51 Latin Americanotably Argentina, Venezuela, Inter-regional M&A was dominated by Argentinean companies 53 AustraliaBolivia and Ecuador, are reluctant to seeking opportunities in the high growth Brazilian steel market. 54 Canadaapprove projects from multinational Techint Group’s acquisition of a 27.7% ($2.8b) share in Usiminas, 55 Chinacompanies seeking to gain control the largest flat steel producer in Brazil, was such an example. This 57 Indiaof their natural resources. Other alliance, which includes Nippon Steel, gives Techint Group access 58 Indonesiabarriers to entry, such as government to iron ore mines in the Serra Azul region and strategically located 59 Japanregulations and bureaucracy, reduce facilities near the main consumers of steel in Brazil. Another 60 Russiathe region’s attractiveness. example is Tenaris’ acquisition of a 56.0% interest in Confab 61 South KoreaMexico, with good macroeconomic Industrial for $771m. 62 United Kingdom 63 United Statesfundamentals, is well positioned to supply There were two outbound deals of note in 2012:the North American market and offers • CSN’s acquisition of Stahlwek Thueringen for $632m, givingone of the most competitive mining tax CSN access to a steel manufacturing plant in Germanyschemes globally. Chile, Peru and Colombiaalso offer attractive opportunities for • Chile-based Molymet’s acquisition of a 13% stake in Molycorp ofinvestment. the US for $390m which provided the opportunity to diversify into other strategic mineralsThe largest deal in the region in 2012 wasCodelco and Mitsui’s $2.9b joint venture Investment in Latin America is normally coupled with largeacquisition of a 29.5% stake in Anglo infrastructure projects, requiring significant levels of capital,American Sur (‘AAS’), which brought which in the current environment is becoming more challengingconciliation proceedings relating to an to find.option agreement to conclusion. AAS owns Companies are frequently seeking alternative sources of loancopper assets in Chile, including the large finance as demonstrated by the raising of $1b by Sierra Gordaopen pit Los Bronces mine, the open pit SCM of Chile from the Japan Bank for International CooperationEl Soldado mine and the Chagres smelter. (JBIC) ($0.7b) and four private Japanese banks. Sumitomo ownsThe original acquisition by Mitsubishi in a 45% stake in Sierra Gorda SCM, a copper and molybdenum2011, and the 2012 legal proceedings project, and has an offtake agreement for 50% of the copperbrought by Codelco, is evidence of the concentrate produced from the Sierra Gorda copper mine.strong demand for scarce high quality The funding issued by the JBIC was in line with the Japanesecopper assets globally. Government’s strategy of securing mineral resources overseas.Canadian companies, with a reputation for There are opportunities for Brazilian companies, or companiesunderstanding the region, continued to be developing in Brazil, to source favorable loan rates from BNDESthe most active acquirers in Latin America, (the Brazilian National Development Bank). However, as withseeking to expand geographical reach and other providers of finance, the BNDES requires the project toobtain lower cost production. For example, be well advanced, with feasibility studies and geological andPan American Silver’s $1.5b acquisition of environmental surveys having been completed. As such, only wellMinefinders Corp. gave the Canada-based resourced companies are in a position to get projects to this stagesilver company scale and helped to balance of development.its portfolio of development and producing 25 “Pan American to Acquire Minefinders for $1.5 Billion,” New York Times, 23 January 2012. Mergers, acquisitions and capital raising in mining and metals 51
  • 52. Capital raising activity during 2012 was largely dominated Outlookby Yankee bond issues by the large cap producers, with Vale Looking forward into 2013, we expect mining and metalsraising $4.8b and Codelco $2.0b to refinance existing debt and companies in Latin America to continue to focus on portfoliofund investment programs. Issuers took advantage of the lower optimization. Strong inbound investment is expected asinterest rates attached to US dollar bonds over domestic currency companies target opportunities for low cost, high growthbonds — Codelco’s bonds made history with its 3% 10-year notes, projects in the region, particularly in countries with a positivereportedly the lowest ever coupon by a Latin America issuer on tax and legislative environment such as Mexico. In addition, theequivalent issues. high quality copper deposits within the region are likely to be targeted for inbound or inter-regional investment. Companies are likely to be increasingly innovative with their approach to raising finance — for example, through strategic partners with the lure of offtake agreements.Latin America deals overview Latin America capital raising by asset class Value ($m) Volume Value ($m) Volume 2011 2012 2011 2012 2011 2012 2011 2012 Outbound 124 1,095 9 9 - IPOs - - - - - - Inbound 18,221 6,780 123 105 Follow ons 4,340 160 6 5 Intra-regional 3,864 7,092 17 23 Convertible bonds - 3 - 2 Total Latin America 22,208 14,967 149 137 Bonds 2,149 10,266 5 14 Global share 14% 16% 16% 16% - Loans 8,052 3,728 12 10 Total Latin America 14,541 14,158 23 31 Total Global 340,422 249,394 3,150 2,874Value of Latin America inbound deals by target commodity ($m) Value of Latin America inbound deals by target country ($m) Gold 2,338 Mexico 2,370Silver lead zinc 2,087 Chile 1,550 Argentina 1,329 Copper 1,881 Colombia 796 Coal 408 Brazil 264 Uranium 21 Peru 191 Other 45 Panama 169 Other 112Top 10 Latin America deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 2,900 Intra-regional; inbound Anglo American Sur Chile Codelco; Mitsui Chile; Japan 29.5 2,823 Intra-regional Usiminas Brazil The Techint Group Argentina 27.7 1,483 Inbound Minefinders Corporation Mexico Pan American Silver Canada 100.0 777 Inbound Minera Andes Argentina US Gold Canada 100.0 771 Intra-regional Confab Industrial Brazil Tenaris Investments Argentina 56.0 750 Intra-regional AuRico Gold — certain Mexican assets Mexico Minera Frisco Mexico 100.0 632 Outbound Stahlwerk Thueringen Germany CSN Brazil 100.0 505 Intra-regional Marcobre (Mina Justa) Peru Cumbres Andinas Peru 70.0 423 Inbound Extorre Gold Mines Argentina Yamana Gold Canada 100.0 407 Inbound Vale — Thermal Coal Operation Colombia CPC US 100.052 Mergers, acquisitions and capital raising in mining and metals
  • 53. Value and volume of Australia deals (10 year trend) 38.6 Australia 22.1 23.5 “During 2012, Australia was the most targeted 16.6 destination for M&A, despite inflationary 11.4 14.4 15.7 concerns, as investors continued to seek out 6.5 10.6 opportunities in Australia’s well established 6.6 2.8 mining and metals sector.” 128 206 188 185 316 239 267 293 242 233 Paul Murphy2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Asia-Pacific Volume Value ($b) Value excluding BHP Billiton’s shale gas deals Mining & Metals Transaction Leader Ernst & Young, AustraliaIn value terms, inbound M&A was Outlook Australiadominated by the joint acquisition During 2013, we expect domestic consolidation to continueof a 25% stake in Roy Hill Holdings between the remaining mid-tier companies, as they look to 48 Africaby POSCO, STX Corporation and compete on an even standing, and between the remaining 51 Latin AmericaMarubeni for $3.3b. mid-tier and junior exploration companies. As capital raising 53 Australia 54 CanadaOutside of this deal, coal continued to options tighten, these companies may look to pool resources 55 Chinareign as the most targeted commodity and gain scale. 57 Indiawhere Australian coal companies focused Further acquisition opportunities are likely to arise during the 58 Indonesiaon gaining scale, improving margins, second half of 2013 if commodity prices return to a level to justify 59 Japanachieving synergies and strengthening resurgence in delayed and postponed capex projects. Companies 60 Russiatheir competitive position. may look to form strategic partnerships to secure capital and 61 South KoreaInfrastructure development remains a key ensure balance sheets are not placed under pressure. 62 United Kingdomdetermining success factor for any inbound 63 United States Australia deals overviewinvestment decision. Cost inflation,rising energy costs and labor shortages Value ($m) Volumehave driven up the cost of infrastructure 2011 2012 2011 2012projects by circa 50% relative to the rest Outbound 19,063 1,707 67 78of the world over the past five years, Inbound 12,640 9,426 74 61forcing companies to think carefully before Domestic 6,892 4,544 101 94committing the high capital required for Total Australia 38,594 15,677 242 233the development of Australian target. Global share 24% 15% 24% 25%During the year, BHP Billiton issued the Australia capital raising by asset classlargest AU$ bond issue ever by anycompany outside of the banking sector26. Value ($m) VolumeThe AU$1b notes due 2017 were priced 2011 2012 2011 2012at just 90bps over the benchmark rate, IPOs 501 140 64 28and reportedly attracted an order book Follow ons 8,757 5,660 607 754of over AU$8b. The bond issue may inject Convertibles 130 867 23 39liquidity into Australia’s domestic bond Bonds 5,430 17,189 5 7market and act as a catalyst for other Loans 10,945 12,042 15 18issuers outside of the banking market Total Australia 25,764 35,897 714 846to follow suit during 2013. Total Global 340,422 249,394 3,150 2,874Top 10 Australian deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 3,309 Cross border Roy Hill Holdings Australia Posco; STX Corp; Marubeni South Korea; Japan 25 2,299 Domestic Aston Resources Australia Whitehaven Coal Australia 100 1,521 Cross border Gloucester Coal Australia Yankuang Group China 100 1,335 Cross border Exxaro’s mineral sand operations Australia Tronox US 100 713 Domestic Boardwalk Resources Australia Whitehaven Coal Australia 100 569 Cross border Allied Gold Mining Papua New Guinea St Barbara Australia 100 444 Cross border Isaac Plains Coal Management Australia Ocean Coal Mining (Sumitomo) Japan 50 430 Cross border BHP Billiton’s Yeelirrie deposit Australia Cameco Canada 100 353 Cross border Aston Resouces’ Maules Creek project Australia J-Power Australia Japan 10 318 Cross border Roy Hill Holdings Australia China Steel Corporation Taiwan 2.526 “BHP sells first Aussie dollar bonds in more than a decade”,Bloomberg, 9 October 2012. Mergers, acquisitions and capital raising in mining and metals 53
  • 54. Canada Value and volume of Canada deals (10 year trend) 73.4 103.3 “Canadian companies accounted for 37% of global transactions volume, reflecting Canada’s high 33.9 concentration of mid-tier and junior mining and 29.0 29.9 metals companies, led by experienced executives 11.7 2.6 10.6 10.2 with a strong drive for growth and the confidence 18.8 to pursue acquisitions in turbulent times.” 107 161 126 227 300 295 442 425 431 351Jay Patel 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Mining & MetalsTransactions Leader Volume Value ($b)Ernst & Young, Canada Canada Despite year-on-year decreases in effect on Canadian junior mining and metals companies that look overall Canadian M&A during 2012, to be acquired by non-residents. These rules could prove to be a Africa 48 Canada maintained its 18% share significant barrier to investment in Canada. Latin America 51 of global M&A activity by value. While overall equity market conditions were challenging, the Australia 53 Outbound deal value was driven Canadian market performance was relatively strong, with the TSX- Canada 54 by large, cross border strategic Venture exchange hosting the highest share of IPOs by number. China 55 acquisitions by companies seeking to India 57 expand existing operations. Canada’s streaming companies had a strong year, with Franco- Indonesia 58 Nevada Corp., Silver Wheaton and Sandstorm Gold among those Japan 59 With heightened concern around resource securing major agreements with, and providing an alternative Russia 60 nationalism and country risk, inbound source of funding to, advanced juniors and mid-tier producers. South Korea 61 investors see Canada as a transparent, developed and attractive place to do Outlook United Kingdom 62 United States 63 business, suggesting that buyers view In 2013, we expect investment to continue, albeit at a slower the move by the Canadian Government pace, with Canadian companies looking to scale-up existing to block BHP Billiton’s bid for PotashCorp operations through the acquisition of largely “de-risked” assets. as an isolated event. However, buyers are Consequently, Canadian mining and metals companies are concerned with Canada’s recently-enacted expected to look close to home for potential M&A targets where tax legislation, which is aimed at non- mining and metals friendly Latin American countries such as resident parent companies that undertake Peru, Chile and Mexico are the likely investment destinations. schemes with their Canadian subsidiaries The Canada-China Foreign Investment Protection and Promotion to erode the income tax base and defer Agreement (effective November 2012) is expected to reignite dividend withholding tax. While the general Chinese SOE interest in the country’s resources sector, as Canada policy behind the legislation is reasonable, looks to stimulate economic growth in a move that will help offset there could be a longer-term adverse ailing inbound investment from the US27. Canada capital raising by asset classCanada deals overview Value ($m) Volume Value ($m) Volume 2011 2012 2011 2012 2011 2012 2011 2012 Outbound 11,164 9,146 151 168 IPOs 367 392 49 42 Inbound 12,524 7,476 45 35 Follow ons 11,238 8,931 1,484 1,310 Domestic 6,239 2,183 235 148 Convertible bonds 391 779 24 42 Total Canada 29,927 18,804 431 351 Bonds 8,442 11,926 7 18 Global share 18% 18% - 43% 37% Loans 16,982 14,742 16 18 Total Canada 37,420 36,769 1,580 1,430 Total Global 340,422 249,394 3,150 2,874Top 10 Canada deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 3,344 Cross border Quadra FNX Mining Canada KGHM Polska Miedz Poland 100.0 2,345 Cross border European Goldfields Greece Eldorado Gold Canada 100.0 1,483 Cross border Minefinders Corporation Mexico Pan American Silver Canada 100.0 1,288 Cross border Neo Material Technologies Canada Molycorp US 100.0 1,012 Cross border Grande Cache Coal Canada Winsway Coking Coal Holdings; Marubeni China; Japan 100.0 777 Cross border Minera Andes Argentina US Gold Canada 100.0 597 Domestic Trelawney Mining & Exploration Canada IAMGOLD Canada 100.0 590 Cross border Hathor Exploration Canada Rio Tinto UK 94.3 537 Domestic Queenston Mining Canada Osisko Mining Canada 100.0 450 Cross border Cabot Corporation’s Supermetals business US Global Advanced Metals Canada 100.0 27 “Investment agreement with China will benefit Canada,” The Globe and Mail, 2 November 2012.54 Mergers, acquisitions and capital raising in mining and metals
  • 55. Value and volume of China deals (10 year trend) 73.4 103.3 China “Despite slowing global and domestic economic growth, China took the lead as the most 33.9 29.0 29.9 acquisitive nation during 2012 in value terms,11.7 which is indicative of China’s counter-cyclical 2.6 10.6 10.2 18.8 investment strategy.” 107 161 126 227 300 295 442 425 431 3512003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Eleanor Wu China Outbound Volume Value ($b) Transactions Leader Ernst & Young, ChinaChina’s M&A activity accounted for • Outbound M&A activity has been further supported by an China21% of total sector M&A globally increase in non-state-owned entities pursuing an outbound M&Afor the year, up from 9% percent in strategy, often supported by Chinese financial backing. 48 Africa2011. In value terms, 2012 marked • Large-scale Government-led domestic consolidation in the steel 51 Latin Americathe most significant investment over and coal sectors boosted M&A activity in 2012. The largest 53 Australiathe last 10 years, with the exception deal of this nature was the $1.2b merger of Shandong-based 54 Canadaof 2008 — the year when Chinalco 55 China steelmakers, Laiwu Steel and Jinan Iron & Steel28.acquired a 12% stake in Rio Tinto for 57 India Chinese investors have recently felt the impact of mining and 58 Indonesia$13.4b. This growth is attributed to a metals cost inflation in traditional mining and metals nations, 59 Japannumber of factors: where previous acquisitions reside. For example, China’s largest 60 Russia• The growing opportunities for Chinese state-led investment in the Australian mining and metals sector, 61 South Korea mining and metal companies to add the Sino Iron project, is reported to be subject to delays and 62 United Kingdom value as strategic partners supporting budget over-runs29. These pressures, together with a lack of 63 United States infrastructure development is driving up availability of under-developed large-scale resources, are forcing M&A activity. Increasingly, large-scale China to consider options outside of the traditional mining and low-cost expansion projects are being metals destinations. As a result, we saw China-based companies pursued in under-developed mining and actively targeting Africa-based assets for growth during 2012. metals markets, where the need for Investment into Africa from China often takes the form of the infrastructure development is great. acquisition of a listed mining and metals company with assets• Chinese acquisition of assets and located in Africa. These deals are attractive as they offer commodities tends to be counter-cyclical increased transparency of information, greater standards of as Chinese investors have long-term corporate governance and can take less time to complete if the investment horizons and appear to terms are seen as favorable by shareholders. be less impacted by economic factors Stand-out acquisitions of this nature include: outside of China. Chinese mining and metals companies buy at what they • China Guangdong Nuclear Power Holding’s acquisition of perceive to be bottom of the cycle to Extract Resources and related acquisition of Kalahari Minerals, stockpile or secure future supply at in total paying $2.3b to gain access to the Husab uranium lower prices, at a time when other project in Namibia. competitors may lack the capital • Shandong Iron & Steel Group’s (SISG) acquisition of a 25% or shareholder support to make stake in Tonkolili Iron Ore, African Mineral’s Sierra Leone-based acquisitions. asset, for $1.5b. This provided part funding for the three-phase• Chinese SOEs are increasingly adopting expansion program, including the development of a rail and an “outward” focus. State entities, as port infrastructure. Under the terms of the deal, an offtake mandated by their Government owners, agreement was signed, providing SISG with a long-term supply are increasingly looking overseas for of iron ore. both investments in mineral resources • China Minmetals Corporation’s $1.3b acquisition of JSE-listed and expansion of their own operating Anvil Mining, which is developing copper projects in the DRC. capabilities. Debt as a funding option appears to be favored over equity in China, mirroring the wider global trend. Chinese capital markets were dominated by large-scale bond offerings by steel and coal 28 “Jinan Steel proposes new merger plan,” China Daily, 13 April 2011. 29 “Sino iron starts concentrate output,“ Mining Journal, 26 November 2012. Mergers, acquisitions and capital raising in mining and metals 55
  • 56. companies looking to optimize their capital structures. China’s IPO Outlookproceeds dropped off considerably during 2012 at just $711m, As we look forward to 2013, the world watches China undergocompared with $2.6b in 2011, reflecting weaker global sentiment. a transition of leadership. The new regime’s position onDuring 2012, Chinese companies also undertook debt infrastructure development is likely to have a significant impactrestructuring activity, a product of domestic consolidation. This on demand for resources. We are likely to see Chinese miningis often used as a method for companies to address insolvency and metals companies look to make acquisitions of assets in theconcerns, thereby avoiding the need for Government-backed advanced exploration and development stages to support long-banks to issue new debt, where terms can be renegotiated on the term growth plans.back of a stronger, merged entity.China deals overivew China capital raising by asset class Value ($m) Volume Value ($m) Volume 2011 2012 2011 2012 2011 2012 2011 2012Outbound 9,079 9,127 62 61 IPOs 2,645 711 12 6Inbound 745 29 12 6 Follow ons 8,749 3,714 34 20Domestic 5,618 12,560 48 80 Convertible bonds 584 294 4 5Total China 14,932 21,716 122 147 Bonds 22,055 17,333 48 31Global share 9% 21% 12% 16% Loans 1,777 1,428 9 6 Total China 35,810 23,478 107 68 Total Global 340,422 249,394 3,150 2,874Top 10 Chinese deals (2012)Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 1,521 Cross border Gloucester Coal Australia Yankuang Group China 100.0 1,500 Cross border Tonkolili Iron Ore Sierra Leone Shandong Iron & Steel Group China 25.0 1,283 Cross border Anvil Mining Democratic China Minmetals Corporation China 100.0 Republic of Congo 1,271 Cross border Extract Resources Namibia China Guangdong Nuclear Power Holding China 42.7 1,201 Domestic Laiwu Steel China Jinan Iron & Steel China 100.0 1,172 Domestic Yima Coal Industry Group’s coal assets China Henan Dayou Energy China 100.0 1,009 Cross border Kalahari Minerals Namibia China Guangdong Nuclear Power China 100.0 940 Domestic Prosper Well Group China China Daye Non-Ferrous Metals China 100.0 731 Domestic Jiangxi Coal Industry Group China Anyuan Industrial Co. China 100.0 687 Domestic Zhengzhou Coal Industry (Group)’s coal China Zhengzhou Coal Industry & Electric Power China 100.0 assets56 Mergers, acquisitions and capital raising in mining and metals
  • 57. Value and volume of India deals (10 year trend) 6.6 4.9 India 3.9 “Raw material security for both the steel and energy sector will continue to be the key 2.2 driver for cross-border investments by Indian 0.9 companies in the mining sector. We expect 0.4 1.0 0.1 0.1 0.6 0.7 mining-related outbound M&A and steel-related 7 8 12 17 12 11 16 20 24 19 inbound M&A to be the themes for 2013.”2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Nitin Gupta Mining & Metals Volume Value ($b) Value excluding Vedanta Resources’ oil and gas deal ($b) Transactions Leader Ernst & Young, IndiaIndia-based mining, metals and Many of these companies are likely to pursue equity divestments Indiaenergy companies are actively to deleverage their balance sheets during 2013.pursuing cross border M&A, largely 48 Africa Outlookas the ability to expand resources 51 Latin Americadomestically has been restrained. We expect to see some deregulation of the coal industry during 53 AustraliaThese companies are targeting 2013 as the need to increase production and promote greater 54 Canadaresources across the globe, as efficiencies becomes more prominent in the face of critical power 55 Chinasecuring a stable supply of raw shortages. If successful, this is likely to encourage more domestic 57 Indiamaterials for the growing steel and consolidation in India’s coal sector during 2013. 58 Indonesiapower markets remains the biggest We do not expect the appetite for outbound M&A to subside 59 Japanpriority. during 2013, as companies continue to target not only steel 60 Russia and energy raw materials (iron ore, coal, manganese, chrome), 61 South KoreaDuring 2012, there appeared to be a 62 United Kingdomstrong appetite for acquisitions among but also base metals, rock phosphate and potash to support domestic growth. 63 United StatesIndia-based coal and metals companies,particularly overseas. Yet completed deals India deals overviewwere few and far between as managementstruggled to justify valuation premiums Value ($m) Volume 2011 2012 2011 2012seen on deals during the year. Of the Outbound 1,415 315 12 7outbound deals that did go through, major Inbound 13 75 2 2 -industrial conglomerates targeted overseas Domestic 3,457 358 10 10 -coal assets for fuel security in the second Total India 4,885 748 24 19half of the year, following a major country- Global share 3% 1% 2% 2% -wide power blackout in July 2012 thathighlighted India’s looming energy crisis30. India capital raising by asset classThe decision of the Reserve Bank of Proceeds ($m) VolumeIndia (RBI) to cut interest rates during 2011 2012 2011 2012the second quarter of the year prompted IPOs 19 - 2 -some steel companies to refinance Follow ons 1,132 1,385 18 7existing loan facilities, securing improved Convertible bonds 8 - 1 -rates. However, cash flows of Indian steel Bonds 1,085 2,315 6 17companies remained under pressure, Loans 12,888 4,810 25 13owing to the subdued pricing environment Total India 15,131 8,510 52 37together with rising raw material costs. Total Global 340,422 249,394 3,150 2,874Top 10 India deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 179 Domestic Welspun Maxsteel India Welspun Corporation India 87.50 120 Domestic Lloyds Steel Industries India Uttam Galva group companies India 58.35 115 Cross border CIC Energy Corporation Botswana Jindal Steel & Power India 100.00 90 Cross border Western Cluster Liberia Sesa Goa India 51.00 39 Cross border Navyug Special Steel India Mitsui; Sanyo Special Steel Japan 49.00 36 Cross border Raykal Aluminium Company India Vedanta Resources UK 24.50 34 Cross border Western Cluster Liberia Sesa Goa India 49.00 31 Cross border Gujarat NRE Coking Coal Australia Jindal Steel & Power India 10.40 25 Cross border Gujarat NRE Coking Coal Australia Jindal Steel & Power India 9.15 20 Cross border Legacy Iron Ore Australia NMDC India 50.0030 “Powerless In India: ‘World’s Biggest Blackout’ Leaves 600MIn The Dark,” Forbes, 31July 2012. Mergers, acquisitions and capital raising in mining and metals 57
  • 58. Indonesia “Increased regulation slowed investment into Indonesia during 2012 as the Indonesian Government looks to transform its mining and metals industry into a producer of higher value finished goods.”David RimboTransactions LeaderErnst & Young, Indonesia Indonesia During 2012, the most significant Outlook mining and metals regulation Despite these challenges, foreign investment is unlikely to cease Africa 48 development in Indonesia was altogether: Indonesia’s mineral resources are too big a lure to Latin America 51 the Government’s move to limit ignore. Large-scale, profitable resources are likely to remain Australia 53 long-term foreign ownership to attractive. However, marginal investments, particularly those Canada 54 49% through mandated, staged projects with heavy infrastructure investment requirements, are China 55 divestments over the next 10 years. unlikely to be attractive to overseas investors. India 57 Additionally, the Government has Indonesia 58 Indonesia deals overview Japan 59 implemented a ban on exports of raw Russia 60 material of certain commodity groups, Value ($m) Volume including nickel and copper. The ban 2011 2012 2011 2012 South Korea 61 became effective from May 2012, Outbound - - - - United Kingdom 62 although exempt companies are permitted Inbound 5,204 1,199 30 21 United States 63 to export ore until 2014, subject to a 20% Domestic 479 1,431 10 7 export tax. One method for obtaining Total Indonesia 5,683 2,630 40 28 exemption is through demonstration of Global share 3% 3% - 4% 3% plans to build local processing facilities. This brings new challenges, as a relatively Indonesia capital raising by asset class infant mining and metals nation’s local Proceeds ($m) Volume capability and technical knowledge 2011 2012 2011 2012 to develop these facilities are scarce. IPOs 391 95 3 2 Partnerships with experienced overseas Follow ons 428 64 2 1 players, in the form of joint ventures and Convertible bonds - - - - - - strategic investments, are likely to fill Bonds 563 500 3 1 this gap, and there may be opportunities Loans 3,195 3,139 9 5 for those who can work within the new Total Indonesia 4,577 3,798 17 9 regulatory framework. Total Global 340,422 249,394 3,150 2,874Top 10 Indonesia deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 1,000 Domestic Bumi Indonesia Borneo Lumbung Energi Indonesia 23.8 460 Cross border Sakari Resources Indonesia PTT Mining Thailand 10.0 326 Cross border Sakari Resources Indonesia PTT Mining Thailand 45.6 205 Domestic Multi Tambangjaya Utama Indonesia PT Indika Indonesia Resources; Indika Indonesia 85.0 Capital Investment 197 Cross border Manambang Muara Enim Coal Mine Indonesia Electricity Generating Thailand 40.0 160 Domestic Nusa Halmahera Minerals Indonesia Aneka Tambang (Persero) Indonesia 7.5 103 Cross border Universe Glory Indonesia Interchina Resources China 100.0 50 Domestic Indo Mines Indonesia Rajawali Group Indonesia 46.5 30 Cross border Kintap Coal Mine Indonesia Investor Group South Korea 30.0 29 Cross border South East Asia Energy Resources Indonesia Victory West Metals Australia 100.058 Mergers, acquisitions and capital raising in mining and metals
  • 59. Value and volume of Japan deals (10 year trend) 15.0 Japan 9.3 “The Japanese steel sector has shifted dramatically, with two major players emerging 5.6 5.3 from the mergers of Nippon Steel Corp with 1.8 2.3 Sumitomo Metals and Nisshin Steel with Nippon 0.8 0.6 1.1 1.1 Metal Industry during 2012.” 34 16 22 22 22 35 19 22 16 182003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Kunihiko Taniyama Japan Mining & Metals Volume Value ($b) Transactions Leader Ernst & Young, JapanJapanese trading houses adopted Japanese steel companies were active borrowers during 2012, Japana cautious approach to M&A capitalizing on local relationships to secure loans. While proceedsduring 2012 on the back of global raised through Japan’s bond market decreased year-on-year, the 48 Africaeconomic factors and weaker Bank of Japan remained committed to facilitating low cost funding 51 Latin Americaearnings. While these factors stunted for domestic borrowers. Yen bond issues by steel companies paid 53 Australialarge-scale M&A activity by these average coupons of just 0.6%, with average spreads of 20bps 54 Canadainvestors overall, competition for above the benchmark rate. This compares with an average spread 55 Chinascarce copper resources continued of 182bps above the benchmark on US dollar bonds of similar 57 Indiaapace. With their traditional long- quality and maturities. 58 Indonesiaterm investment outlook, M&A 59 Japan Outlook 60 Russiaopportunities for Japanese trading While M&A is likely to still take the form of strategic, minority 61 South Koreacompanies are increasing as mining investments, we have seen examples of trading houses looking 62 United Kingdomand metals companies increasingly to take on greater technical expertise as they seek more 63 United Stateslook to secure strategic partnerships. operational influence.As domestic consumption of minerals andmetals continues to fall, Japanese trading Japan deals overviewhouses have been looking to the wider Value ($m) VolumeAsian markets for growth and to resource- 2011 2012 2011 2012rich geographies for supply. The need to Outbound 9,199 5,122 12 13secure resources, including copper, iron Inbound - - - -ore, coal, uranium and aluminium, could Domestic 99 9,922 4 5prompt more M&A activity during 2013 as Total Japan 9,298 15,045 16 18many of the Japanese trading companies Global share 6% 14% 2% 2% -enter into their new investment cycle. Japan capital raising by asset classIn the Japanese steel sector, newly mergedgroups are seeking to realize synergies and Proceeds ($m) Volumescale back costs in the face of challenging 2011 2012 2011 2012market conditions, and are looking to IPOs - - - - - -access global markets for growth. Follow ons 282 - 3 - Convertible bonds - - - - - - Bonds 3,752 1,370 21 7 Loans 7,350 4,236 42 21 Total Japan 11,385 5,606 66 28 Total Global 340,422 249,394 3,150 2,874Top 10 Japan deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 9,432 Domestic Sumitomo Metal Industries Japan Nippon Steel Japan 100.0 1,654 Cross border Roy Hill Holdings Australia Marubeni (excl. POSCO and STX) Japan 12.5 1,100 Cross border Anglo American Sur Chile Mitsui (excl. Codelco) Japan 5.0 444 Cross border Isaac Plains Coal Management Australia Ocean Coal Mining (Sumitomo) Japan 50.0 405 Cross border Grande Cache Coal Canada Marubeni (excl. Winsway Coking Coal Japan 40.0 Holdings) 435 Cross border Xstrata Coal British Columbia Canada JX Nippon Oil & Energy Japan 25.0 354 Cross border Antofagasta’s Antucoya project Chile Marubeni Japan 30.0 353 Cross border Aston Resources’ Maules Creek project Australia J-Power Australia Japan 10.0 316 Cross border Crosslands Resources Australia Mitsubishi Development Japan 50.0 173 Domestic Toho Titanium Japan JX Holdings Japan 14.8 Mergers, acquisitions and capital raising in mining and metals 59
  • 60. Russia Value and volume of Russia deals (10 year trend) 16.4 25.5 “Russia’s mining and metals sector is changing, 12.5 14.2 following proposals to alleviate restrictions for the foreign acquisition of mid-tier assets 7.2 and plans to improve investment climate by 2.6 4.3 4.5 4.7 attracting foreign funds in the sector, especially 1.9 in the Far East regions of Russia.” 8 12 17 20 21 37 21 33 30 32Evgeni Khrustalev 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012CIS Mining & Metals LeaderErnst & Young, Russia Volume Value ($b) Russia Russia has a well-developed mining market by Russian companies. Polyus Gold achieved a Premium and metals industry which is listing on the LSE in order to gain access to international investors Africa 48 to fund its expansion program. Global Depositary Receipts (GDRs) dominated by a few large players. Latin America 51 Exploration and development in Severstal subsidiary, Nordgold, began trading on the LSE, Australia 53 capabilities domestically are representing 10.6% of its share capital, cementing Nordgold’s Canada 54 limited and geological exploration position as an independent pure-play gold producer. China 55 is declining. As a result, future India 57 Outlook growth of the sector is dependent Indonesia 58 on Russia’s ability to attract foreign There is a strong IPO pipeline of Russian companies which are Japan 59 exploration expertise into Russia, expected to pursue an overseas listing when the market reaches Russia 60 although this is unlikely to translate a period of stability, and we see a number of these coming to South Korea 61 domestic and international markets during 2013. The first half of into increased inbound M&A in the United Kingdom 62 2013 is likely to continue to be challenging for the sector, where short term. United States 63 capital will remain constrained. We also see little appetite for In value terms, M&A activity involving further large-scale domestic consolidation but were it to prevail, it Russian mining and metals companies would most likely be in the form of paper deals. decreased during 2012, following a peak of domestic consolidation during 2011. Russia deals overview Russia’s over-leveraged steel companies Value ($m) Volume have been under further pressure during 2011 2012 2011 2012 2012 due to challenging conditions in Outbound 2,246 1,503 7 5 the global steel market, and are seeking Inbound 6,119 553 8 11 to optimize capital structures. For many, Domestic 17,159 2,628 15 16 however, access to capital is constrained Total Russia 25,523 4,684 30 32 and many steel companies may be forced Global share 16% 5% 3% 3% - to make divestments of non-core assets Russia capital raising by asset class in order to raise the necessary funding to improve balance sheets, presenting future Proceeds Volume buying opportunities. 2011 2012 2011 2012 While not included in our IPO data31, IPOs - - - - - - both Polyus Gold and Nordgold Follow ons 721 245 2 3 listed their shares on the London Convertible bonds - - - - - - Stock Exchange (LSE) in 2012, Bonds 1,950 3,597 3 11 reflectingcontinued attraction to the Loans 20,919 2,761 18 7 Total Russia 23,590 6,604 23 21 Total Global 340,422 249,394 3,150 2,874Top 10 Russia deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 1,128 Cross border BASF’s fertilizer Plant Belgium MKHK YevroKhim (Eurochem) Russia 100.0 1,037 Domestic Geotransgaz and Urengoi Gas Company Russia AK Alrosa Russia 90.0 425 Cross border Polyus Gold International Russia Chengdong Investment Corporation China 5.0 405 Domestic 31 Severneft-Urengoy Russia MKHK YevroKhim (Euro Chem) Russia 100.0 344 Domestic Apatit Russia PhosAgro Russia 26.7 211 Domestic Polyus Gold International Russia VTB Bank Russia 2.5 209 Domestic Verkhnekamskaya Kaliynaya Komp Russia Investor Group Russia 38.0 182 Cross border K+S’s nitrogen fertilizer business Germany MKHK YevroKhim (Euro Chem) Russia 100.0 143 Domestic SUEK-Krasnoyarsk Russia SUEK Russia 10.4 120 Cross border GPM Georgia Georgia Capital Group Russia 100.031 Only original IPOs are included in our data, per Thomson — the first issue of shares in any market.60 Mergers, acquisitions and capital raising in mining and metals
  • 61. South Korea “Securing supply to manage raw material costs continues to be the primary factor driving South Korean steel companies’ investment in overseas iron companies.” Kwang Sun Kwon Mining & Metals Leader Ernst & Young, South KoreaThe total value of deals completed in slowdown in M&A investment, these bond issues imply that steel Souththe sector by South Korean mining companies are focused on improving balance sheet strengthand metals companies increased rather than spending cash on business expansion. Koreaduring 2012 as a result of the joint Outlook 48 Africaacquisition by the POSCO, STX 51 Latin AmericaCorporation and Marubeni of a 25% It is unlikely that the slowdown in M&A will be sustained during 53 Australiastake in Roy Hill Holdings, with 2013. South Korea is reliant on imports for nearly all of its mineral 54 CanadaPOSCO and STX Corporation’s share supply and the Korean Government is likely to drive strategic 55 Chinaaccounting for 12.5%. acquisitions to secure this supply, primarily of rare earth and 57 India uranium assets. 58 IndonesiaExcluding this deal, total South Koreandeal value was $416m during 2012, We expect the corporate bond market to remain open to 59 Japanrepresenting a 59% decrease year-on- South Korean mid-tier steel companies. However, investors 60 Russiayear. South Korean mining and metals are likely to seek higher coupons for steel makers to reflect 61 South Koreacompanies have continued to be cautious the increased risk associated with these raisings. 62 United Kingdom 63 United Statesin their approach to investing in the mining South Korea deals overviewand metals sector, as they focused on cashpreservation during 2012. Value ($m) Volume 2011 2012 2011 2012South Korean steel companies were placed Outbound 910 2,020 13 8under pressure during the year, where Inbound 6 - 2 -extensive competition from Chinese steel Domestic 107 51 16 7producers squeezed margins, threatened Total South Korea 1,023 2,070 31 15growth and resulted in credit rating Global share 1% 2% 3% 2%downgrades and non-core asset sales.The South Korean capital markets were South Korea capital raising by asset classcomparatively strong against relatively Proceeds ($m) Volumelow benchmark rates — we witnessed both 2011 2012 2011 2012investment grade and high yield steel IPOs - - - -companies issuing bonds (albeit raising Follow ons 23 405 3 4relatively low proceeds) to supplement Convertible bonds 148 155 2 2constrained cash flow. Combined with a Bonds 7,126 1,547 39 10 Loans 642 1,138 2 2 Total South Korea 7,939 3,245 46 18 Total Global 340,422 249,394 3,150 2,874Top 10 South Korea deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 1,655 Cross border Roy Hill Holdings Australia Posco; STX Corp (excl. Marubeni) South Korea 12.5 169 Cross border LS-Nikko Copper (Cobre Panama) Panama Korea Panama Mining South Korea 20.0 90 Cross border Minera y Metalurgica del Boleo Mexico Kores; LS-Nikko South Korea 21.0 58 Cross border Cambayas Mining Corp Philippines Investor Group South Korea 40.0 30 Cross border Kintap Coal Mine Indonesia Investor Group South Korea 30.0 19 Domestic Posmate South Korea POSCO South Korea 21.6 18 Domestic Steel Flower South Korea KoFC Posco Hanwha South Korea 11.6 8 Cross border Strathmore Minerals US Korea Electric Power Corporation (KEPCO) South Korea 13.9 6 Cross border PT Golden Hoder Indonesia Gibio South Korea 30.0 5 Domestic SPP Resources South Korea SeAH Steel South Korea 100.0 Mergers, acquisitions and capital raising in mining and metals 61
  • 62. UK Value and volume of UK deals (10 year trend) 68.5 “A number of significant deals took place during 2012 by UK acquirers. However, 29.1 the majority of deal value represented 13.2 transactions where a stake was already 8.1 5.4 7.0 held, illustrating the risk-averse nature 2.1 10.8 2.2 3.6 of M&A right now.” 40 42 42 46 67 54 53 45 41 40Lee Downham 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Global Mining &Metals Transactions Leader Volume Value ($b)Ernst & Young, UKIUnited The UK was among the more Outlook acquisitive countries in value terms,Kingdom largely due to Anglo American’s Looking forward to 2013, we expect UK mining and metals companies to continue to focus on portfolio optimization. Africa 48 $5.2b acquisition of an additional Through this, we are likely to see the divestment of a number of Latin America 51 40% stake in De Beers, increasing its non-core assets, such as the announced disposal by Rio Tinto of Australia 53 total share to 85%. its diamond business, as well as the acquisition of further stakes in Canada 54 Other notable deals included, Rio Tinto’s strategically valuable assets. China 55 acquisition of an additional 37% stake The merger between UK-listed Glencore International and Xstrata, India 57 in Richards Bay Minerals (RBM) from is likely to change the competitive landscape for other listed Indonesia 58 BHP Billiton for $1.9b, increasing its diversified mining and metals companies. It is expected to prompt Japan 59 total share of the mineral sands mining further investment activity, although this is unlikely to play out Russia 60 and processing company to 74%; and fully during 2013. South Korea 61 the legal settlement between First United Kingdom 62 Quantum Minerals and Eurasian Natural A strong start to UK equity markets during the first weeks of United States 63 Resources Corporation (ENRC), and January 2013 is providing promise for the London IPO market, related acquisition of residual assets in although there will need to be a period of sustained stability respect of the Kolwezi tailings project and before UK IPO activity is fully back on the table. the Frontier and Lonshi mines in the DRC UK deals overview for $1.25b32. Value ($m) Volume Capital raising was dominated by sizeable 2011 2012 2011 2012 bond issues by the diversified majors: a Outbound 12,459 10,773 35 37 staggering total of $23b was raised by Inbound 605 5 4 3 Rio Tinto, Xstrata, Anglo American and Domestic 117 - 2 - Glencore International. Total UK 13,180 10,778 41 40 Companies took advantage of historically Global share 8% 10% 4% 4% - low benchmark yields to issue US dollar, euro and sterling medium- and UK capital raising by asset class long-term notes with attractive coupons Value ($m) Volume from as low as 1.1%. Outside of Glencore 2011 2012 2011 2012 International’s exceptional $19b of bank IPOs 10,886 25 7 5 funding (for refinancing and in connection Follow ons 1,553 2,059 106 104 with its merger with Xstrata), bank lending Convertible bonds 110 362 1 4 was limited. ENRC signed up to a $2b loan Bonds 8,650 23,074 4 13 facility to finance the DRC acquisitions and Loans 22,066 23,515 13 10 support the Group’s capex program33. Total UK 43,264 49,035 131 136 Total Global 340,422 249,394 3,150 2,874Top 10 UK deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 5,200 Cross border De Beers South Africa Anglo American UK 40.0 1,910 Cross border Richards Bay Minerals South Africa Rio Tinto UK 37.0 1,250 Cross border First Quantum Minerals’ residual assets Democratic Republic of Congo Eurasian Natural Resources UK 100.0 650 Cross border Shubarkol Komir Kazakhstan Eurasian Natural Resources UK 75.0 590 Cross border Hathor Exploration Canada Rio Tinto UK 94.3 550 Cross border Camrose Resources Democratic Republic of Congo Eurasian Natural Resources UK 49.5 299 Cross border Ivanhoe Mines Mongolia Rio Tinto UK 2.0 48 33 Cross border Auzex Resources Australia GGG Resources UK 91.5 36 Cross border Raykal Aluminium Company India Vedanta Resources UK 24.5 31 Cross border Aviva Mining (Kenya) Kenya African Barrick Gold UK 100.032 “First Quantum reaches agreement with ENRC...”, First Quantum Minerals press release, 1 May 2012.33 “US$2 billion loan facility”, ENRC press release, 28 February 2012.62 Mergers, acquisitions and capital raising in mining and metals
  • 63. Value and volume of US deals (10 year trend) 70.2 50.4 US “Mixed fortunes have been seen across the 33.2 US mining and metals sector. Domestic coal 26.5 20.6 companies have struggled in the shadow of the 13.4 8.2 15.1 emergence of shale gas as a cheaper source of 7.9 11.5 8.4 7.3 energy, whereas those with export capabilities 84 91 94 131 149 136 141 144 133 120 have been less affected.”2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Robert Stall Americas Mining & Metals Volume Value ($b) Value excluding BHP Billiton’s oil/shale gas deals Transactions Leader Ernst & Young, United States2012 was an uncharacteristically Outlook Unitedquiet year for a nation which hastraditionally dominated M&A and Looking forward to 2013, we believe that the domestic coal States industry will continue to be challenged, with higher costs, toughercapital raising activity in the sector. regulation and weaker demand expected. Coal companies are 48 AfricaUS M&A activity fell to just 7% of likely to be in survival mode next year. 51 Latin Americaglobal deal value compared with 20% 53 Australia At the other end of the spectrum, US copper companyin the prior year, a figure adjusted 54 Canada Freeport-McMoRan Copper & Gold has announced plans tofor BHP Billiton’s US-based oil and 55 China acquire its former holding in McMoRan Oil & Gas and independentgas acquisitions, or 31% without this 57 India oil and gas company Plains Exploration & Production, a boldadjustment. 58 Indonesia move which will see Freeport diversify its asset base. While 59 JapanAluminium smelting markets have been significant to the mining and metals sector, it is unlikely to prompt 60 Russiachallenged as a result of weaker global others to follow a similar path as Freeport-McMoRan Copper & 61 South Koreademand, while US-based copper and gold Gold has a past footprint in the oil and gas industry. 62 United Kingdomcompanies have fared better, viewed as US deals overview 63 United Statesa safe haven in light of rising US debtobligations and the European sovereign Value ($m) Volumedebt crisis. 2011 2012 2011 2012Domestic consolidation remains important Outbound 14,961 3,652 33 26for the US mining and metals sector, Inbound 18,875 1,667 63 68despite the significant reduction in Domestic 16,549 1,981 37 26domestic deals in 2012. Gaining scale is Total US 50,386 7,300 133 120key to achieving competitive advantage Global share 31% 7% 13% 13% -and keeping operating costs to a minimum. US capital raising by asset classAs a result, we expect to see these deals,mostly using paper rather than debt, Value ($m) Volumereturning in 2013. However, this will 2011 2012 2011 2012perhaps occur later on in the year and on a IPOs 24 - 2 -smaller scale as the immediate focus is on Follow ons 6,350 976 152 16cost and capital optimization efforts. Convertible bonds 974 993 15 13Limited M&A activity drove reduced Bonds 12,637 13,143 18 20 Loans 49,856 15,254 68 31demand for capital. However, both high Total US 69,841 30,366 255 80yield and investment grade companies Total Global 340,422 249,394 3,150 2,874took advantage of favorable bond marketconditions, issuing bonds to reduceindebtedness.Top 10 US deals (2012) Value ($m) Type Target name Target country Acquirer name Acquirer country Stake (%) 1,335 Cross border Exxaro’s mineral sands operations Australia Tronox US 100.0 1,288 Cross border Neo Material Technologies Canada Molycorp US 100.0 605 Domestic Skyline Steel US Nucor Corporation US 100.0 450 Cross border Cabot Corporation’s Supermetals business US Global Advanced Metals Canada 100.0 407 Cross border Vale’s thermal coal operation Colombia CPC US 100.0 390 Cross border Molycorp US Molymet Chile 13.0 334 Cross border Prodigy Gold Canada Argonaut Gold US 100.0 300 Domestic Youngs Creek Mining US Cloud Peak Energy US 100.0 264 Domestic Whitesburg Friday Branch Mine US Universal Bioenergy US 40.0 183 Domestic Remmele Engineering US RTI International Metals US 100.0 Mergers, acquisitions and capital raising in mining and metals 63
  • 64. Ernst & Young’s Global Mining & Metals Center Ernst & YoungWith a strong but volatile outlook for the sector, the global mining and metals Assurance | Tax | Transactions | Advisoryindustry is focused on future growth through expanded production, without About Ernst & Younglosing sight of operational efficiency and cost optimization. The sector is Ernst & Young is a global leader in assurance,also faced with the increased challenges of changing expectations in the tax, transaction and advisory services.maintenance of its social license to operate, skills shortages, effectively Worldwide, our 167,000 people are unitedexecuting capital projects and meeting government revenue expectations. by our shared values and an unwavering commitment to quality. We make a differenceErnst & Young’s Global Mining & Metals Center brings together a worldwide by helping our people, our clients and ourteam of professionals to help you achieve your potential — a team with deep wider communities achieve their potential.technical experience in providing assurance, tax, transactions and advisory Ernst & Young refers to the global organizationservices to the mining and metals sector. of member firms of Ernst & Young Global Limited, each of which is a separate legalThe Center is where people and ideas come together to help mining and entity. Ernst & Young Global Limited, a UKmetals companies meet the issues of today and anticipate those of tomorrow. company limited by guarantee, doesUltimately it enables us to help you meet your goals and compete more not provide services to clients. For moreeffectively. It’s how Ernst & Young makes a difference. information about our organization, please visit contacts United Kingdom & IrelandGlobal Mining & Metals Leader Lee DownhamMike Elliott Tel: +44 20 7951 2178Tel: +61 2 9248 4588 Americas and United States LeaderOceania Andy MillerScott Grimley Tel: +1 314 290 1205Tel: +61 3 9655 2509 CanadaChina and Mongolia Bruce SpraguePeter Markey Tel: +1 604 891 8415Tel: +86 21 2228 2616 South America and Brazil LeaderJapan Carlos AssisAndrew Cowell Tel: +55 21 3263 7212Tel: +81 3 3503 3435 Service line contactsEurope, Middle East, India Global Advisory Leaderand Africa Leader Paul MitchellMick Bardella Tel: +86 21 22282300 © 2013 EYGM Limited. All Rights Reserved.Tel: +44 20 795 16486 EYG no. ER0048 Global Assurance LeaderAfrica Tom Whelan This publication contains information in summary Tel: +1 604 891 8381 form and is therefore intended for general guidanceWickus Botha only. It is not intended to be a substitute for detailedTel: +27 11 772 3386 research or the exercise of professional Neither EYGM Limited nor any other member of the Global IFRS Leader global Ernst & Young organization can accept anyCommonwealth of Independent States Tracey Waring responsibility for loss occasioned to any person acting or refraining from action as a result of any materialEvgeni Khrustalev Tel: +61 3 9288 8638 in this publication. On any specific matter, referenceTel: +7 495 648 9624 should be made to the appropriate Global Tax Leader and Luxemburg Andy MillerChristian Mion Tel: +1 314 290 1205 ED 0114Tel: +33 1 46 93 65 47 Global Transactions LeaderIndia Lee DownhamAnjani Agrawal Tel: +44 20 7951 2178Tel: +91 982 061 4141