Mining metals & commodities M&A´s


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Mining metals & commodities M&A´s

  1. 1. Mergers, acquisitionsand capital raising inmining and metals2011 trends2012 outlookRecognizing value in volatility
  2. 2. 2 Mergers, acquisitions and capital raising in mining and metals
  3. 3. About this studyThe data is primarily sourced from This data has been supplementedwith IHS Herold, Capital IQ, Mergermarket and Factiva.• Commodity analysis is based on the primary commodity produced.• 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. The primary source for this data is Deals identified as incomplete, pending, ThomsonONE. Certain details have been partly incomplete, unconditional or supplemented with information from intended as of 31 December 2011 company and stock exchange websites were excluded. and major business press. Only completed• The acquirer country is based on transactions are included. the ultimate owner’s geographic • Only original Initial Public Offerings headquarters. The target country is (IPOs) — the first time that a company determined by where the primary issues equity to the public — are included targeted asset or company is located. in the IPO analysis. Proceeds are• Country-based refers to domestic and allocated to the primary exchange of inbound deals. issue.• A country’s acquisition refers to • Equity issues are geographically domestic and outbound deals. categorized by the primary exchange where the issuer’s stock trades, except• The value of M&A activity by commodity where stated. Where a company offers includes deals where the given Global Depositary Receipts or American commodity is the acquirer and/or Depositary Receipts, the issue is target’s primary commodity. Commodity allocated to the destination market of charts illustrate the value of deals where those shares. the given commodity is the target. • Loan data and proceeds include• The data does not capture the value of refinancing and amendments to existing transactions where this information is debt, and are as per Thomson Financial not publicly available. intelligence. Proceeds are allocated to• ‘Megadeals’ refer to all deals with a the geography of the borrower. value equal to, or more than, $1b. • All credit rating references are to Standard & Poor’s long-term issuer ratings, unless otherwise stated.Mergers, acquisitions and capital raising in mining andmetals — 2011 trends, 2012 outlookThis Ernst & Young study examines transactions and financing in the mining andmetals sector in 2011, and discusses the outlook for 2012.It provides an in-depth analysis of the major global mining and metalstransactions, capital markets and resulting capital flows, by considering mergersand acquisitions (M&A), initial public offerings (IPOs), bonds and loans. It alsoprovides an analytical breakdown by country and commodity. 2011 trends, 2012 outlook 3
  4. 4. This report was authored by: Lee Downham Global Mining & Metals Transactions Leader Ernst & Young, UKI Tel: +44 (0)20 7951 2178 Conte Themes Mike Elliott Global Mining & Metals Leader Ernst & Young, Australia Tel: +61 2 9248 4588 06 Executive summary Michael Lynch-Bell 10 Mergers & Acquisitions Global Mining & Metals Transactions Partner Ernst & Young, UKI 20 Capital raising Tel: +44 (0)20 7951 3064 30 Outlook Paul Murphy Asia-Pacific Mining & Metals Transactions Leader Ernst & Young, Australia Tel: +61 3 9288 8708 Nicky Crabtree Assistant Director, Transactions Advisory Services Mining & Metals, UKI Tel: +44 (0)20 7951 5237 Natasha Johns Senior Analyst, Mining & Metals Ernst & Young, Australia Tel: +61 2 6267 3887 Emily Colborne Senior Analyst, Mining & Metals Ernst & Young, UKI Tel: +44 121 5352086 ecolborne@uk.ey.comAnd thank you to the Ernst & Young globalMining & Metals team for their support. Mergers, acquisitions and capital raising in mining and metals
  5. 5. ents Appendix Country analysis Frontier markets 33 Australia 36 Brazil 38 Canada 40 China 42 Commodity analysis India 44 Aluminium 59 Indonesia 46 Coal 60 Japan 48 Copper 61 Russia 50 Gold 62 South Africa 52 Iron ore 63 United Kingdom 54 Nickel 64 United States 56 Potash/Phosphate 65 Silver, Lead, Zinc 66 Steel 67 Uranium 68 2011 trends, 2012 outlook
  6. 6. Execu Financial strength of the mining and metals sector By the end of the second half of 2011, the mining and metals sector had successfully ridden the storm of global economic uncertainty, emerging financially stronger and poised for growth. Balance sheets are stronger, with many companies faced with the challenging but positive decision of how best to utilize their capital — the dilemma of buy, build or return is back on many boardroom tables. Despite their recent fall, 2011 commodity prices were up on 2010, driving an improvement in earnings and cash positions. This cash, together with the buoyant corporate debt market, was the primary source of funding for the majors such as Xstrata, Vale, BHP Billiton, Rio Tinto, Anglo American and Glencore. As a result, we saw the junior and mid-tier companies take up a greater share of secondary equity funds during 2011, a trend we expect to continue into 2012. Bulks and metals price performance (2010–2011) 170 150 Indices rebased to 100 at 1 Jan 2011 130 110 90 70 50 2010 2011 Aluminium Nickel Silver Iron ore Copper Gold Thermal coal Source: Thomson Datastream6
  7. 7. utive summary During the second half of 2011, equity markets were increasingly turbulent and as a result alternative funding sources emerged, a trend that will continue in 2012. Funding provided by private M&A — deal value up, but volumes stunted The financial strength of the mining and metals sector would wealth, the majors, state-owned enterprises and sovereign wealth ordinarily present an ideal environment for M&A. However, funds, in return for strategic holdings and/or for off-take, have all while total deal value was up 43% on the prior year to $162.4b, offered a broader range of financing options. volumes were down 10% to 1,008, highlighting the difficulty in evaluating, financing and executing deals at the junior end The further opening up of bond markets during 2011 provided of the market. access to capital to support the growth ambitions of both the majors and the sector’s mid-tiers. Total proceeds from Value and volume of deals by size (2000–2011) bond offerings reached $84b, an increase of 16% on 2010. 250 1,200 This increase was driven by companies taking advantage of tightening credit spreads and overall strong demand for access 200 1,000 to comparatively cheap debt. High yield bond issues dominated 800 Volume 150 during the first half of 2011, but contracted during the latter ($b) 600 half of the year as sovereign debt concerns continued to go 100 400 unresolved across Europe and the US. Conversely, investor appetite for high grade issues remained buoyant throughout 50 200 2011, highlighting the importance of maintaining an investment - 0 grade credit rating. This will help to underpin the capital allocation 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 decisions of boards in the year ahead. During 2011, loan proceeds increased marginally by 2%, with <$200m Between $200m and $1b companies borrowing or re-financing over $187b of debt, > $1b Volume primarily to lock-in favorable rates compared to existing debt and extend tenor in order to provide greater financing agility. There During 2011, strategic M&A dominated in the mining and were also limited examples of borrowing to finance M&A, such as metals sector where the urge to drive down operational costs BHP Billiton’s syndicated bank loan of $7.5b for its acquisition of and achieve growth simultaneously remained the focus of many Petrohawk Energy, and loans by Barrick Gold, Arch Coal and Cliffs mining and metals executives. Sensible, lower risk transacting Natural Resources to part-finance their respective acquisitions. was top of the agenda. This gave rise to an increase in large scale domestic consolidations, offering the promise of synergies and While loan proceeds increased, gearing across the majors, and to conducted in a familiar environment. These deals provided a low a lesser extent the mid-tiers, is at an all time low. Leverage has risk way of achieving growth and leveraging existing knowledge been tamed and balance sheets are far stronger than they were of the market. While the most significant of these was Uralkali’s going into the global financial crisis in 2008. The average gearing combination with Silvinit, valued at $8.2b and forming the levels across a sample of majors had decreased to just 12% at largest potash company in the Commonwealth of Independent June 2011 compared with 69% at December 20081. As a result, States (CIS) region, this trend was seen most in North America. we do not expect to see a significant equity call from the majors Consolidation occurred primarily among large North American during 2012, even in the event of weakening global economic coal companies, striving to achieve economies of scale to improve conditions. This leaves a greater proportion of equity available to their global competitive position. the juniors and mid- tier mining companies. 1 Gearing based on net debt/shareholders’ equity for a representative sample of companies. Please refer to Ernst & Young’s previously published reports, “Wall of debt” and “Life after debt” for further information. 2011 trends, 2012 outlook 7
  8. 8. “Global uncertainty is driving volatility in the equity markets to a degree not seen since the 2008 global financial crisis. Despite this, mining and metals companies are learning to live with uncertainty, balance sheets are stronger and companies are positioned to seize opportunities, albeit with more caution than witnessed during the peak of 2007.” Lee Downham Global Mining & Metals Transactions Leader, Ernst & Young, United KingdomAnother key trend in 2011 was the intensified fight to acquire we did not witness any $10b plus deals during 2011, despitescarce low cost, long life deposits. Rio Tinto’s acquisition of the capacity to transact. This was because management wasRiversdale Mining for $3.9b and China Niobium Investment’s understandably uncomfortable executing transformational deals$2.0b acquisition of CBMM are examples of this trend. Further, that would place balance sheets under financial pressure.we are seeing majors acquiring or making strategic investments injunior exploration companies in order to manage their pipeline of Economic volatility and resource nationalismresources. challenged equity markets and management’sIn value terms, the M&A completed during 2011 was dominated appetite for M&Aby developed mining countries, such as the US, Canada and Although sizeable deals completed during 2011, macroeconomicAustralia. In addition, emerging and frontier mining regions issues and resource nationalism made investment decisions moreare continuing to gain importance and provide a wealth of difficult, contributing to lower volumes of M&A during 2011opportunities, particularly across Africa, South America and compared with 2010.Asia. For some, such as Chinese mining and metals companies, During the second half of 2011, the US credit rating downgrade,investment in these regions is taking the form of off-take Eurozone debt crisis and lessening Chinese growth rates causedagreements or minority stakes in ASX- or TSX-listed companies dramatic stock market volatility and tested the confidence ofwith assets in these regions. For others, such as a number of many mining and metals companies to undertake M&A. In ouraspiring India-based mining and metals companies, it is taking view, this will not last given that the sector fundamentals arethe form of outright M&A to sustain growth and become global strong and growth from China and other BRIC (Brazil, Russia,players in their own right. India and China) nations will fuel demand for metals and minerals.In deal value terms, coal took the lead as the most targeted Mining and metals companies are increasingly looking to transactcommodity during 2011, accounting for over $41.4b, an increase in ways that can accommodate continued volatility.from $17.9b in 2010. This activity was primarily driven by The equity markets are becoming increasingly sensitive tothe large coal producers looking to boost production capacity, macroeconomic news, and for many companies, market valuestogether with vertical integration undertaken by large power and do not appear to be correlating with the value under the ground.utilities companies and steel companies to lock in the supply of Increases in commodity prices are often not fully impacting shareraw material and manage volatility. This clearly demonstrates prices, whereas decreases are. This is creating differing assetconfidence in coal over the life of existing mines, despite the valuation expectations, impacting the ability to complete M&A.rising tide of climate change policies and regulation. This trend will increase the importance of conducting thoroughIn volume terms, gold was the most targeted commodity with diligence, in order for management on both sides of the deal to385 deals completed during 2011. While the main driver of this be at ease.was consolidation between mid-tier mining companies and junior Unsurprisingly, overall IPO volume was down 18% to 145 listingsexplorers to boost production and resources, there were six mega in 2011, with global equity markets weighed down by volatilitydeals targeting gold completed during 2011 which consolidated and uncertainty. However, there was still a healthy number ofsome of the world’s major gold companies. small-scale junior IPOs in Australia and Canada.Activity from the majors was dominated by BHP Billiton’s The challenging market conditions made the biggest impact atmove into US oil/shale gas. Outside of these deals, the majors’ the larger end of the market, with proceeds, excluding the IPOM&A activity focussed on opportunistic acquisitions, rounding of Glencore, down 59% on 2010 and a record number of IPOsout minority holdings and divesting non-core or higher cost postponed and remaining firmly in the pipeline.businesses, as well as, returning cash to shareholders. Outsideof BHP Billiton’s acquisition of Petrohawk Energy for $11.8b,8 Mergers, acquisitions and capital raising in mining and metals
  9. 9. Executive summaryThe spread of resource nationalism across developed, emerging mining and metals companies are increasingly looking at multipleand frontier countries was a key concern among mining and financing options and in making valuations are factoring in cashmetals executives, causing uncertainty and delay to M&A flows on a longer term basis and applying risk on a much moreinvestment decisions. Resource nationalism is often viewed as sophisticated basis.a part of doing business in the sector and the risk is factored Beyond the junior listings, a record number of IPOs wereinto deal valuations, but the increasing prevalence of resource postponed in 2011 and there is a strong pipeline of companiesnationalism, and the uncertainty that it generates, is making it that will “pounce” when there is a sustained period of confidenceharder to value assets over the life of mine. However, for those and stability in equity markets. If markets stabilize, this maygovernments who continue to debate legislation and manage happen in the second half of 2012.these changes less efficiently, the uncertainty could potentiallydeter investment for anything other than the largest, most The fitter and faster companies will be best placed to maximizescalable and low cost assets. opportunities for growth during 2012. We expect the number of deals in those emerging and frontier countries that have highOutlook — striking the balance and exploring capital quality resources and friendly foreign investment rules to rampraising options up this year as risk appetites increase. This shift is primarily due to the diminishing availability of quality mineral deposits inRobust demand fundamentals, strong balance sheets and an developed mining countries at a reasonable price.appetite for growth will drive a step-up in M&A in the globalmining and metals sector in 2012. The uncertainty and volatilityis likely to continue through 2012, but mining and metals The Capital Agendacompanies have an appetite for growth and are increasingly Based around four dimensions, it helps mining and metalsunwilling to stall their growth plans, so it’s likely there will be a companies consider their issues and challenges andreturn to deal-making in 2012. Those who can work with volatility understand their options to make more informed capitalwill be the dealmakers in 2012 and there may well be real buying decisions.opportunities. 1. Preserving capital: reshaping the operational andThe focus of capital raising in 2011 was not aggressive capital basere-leveraging but clever re-financing. Companies are coming into 2. Optimizing capital: driving cash and working capital and2012 with credit rating strength and the capacity to gear up for managing the portfolio of assetsfuture acquisitions. 3. Raising capital: assessing future capital requirementsMining and metals companies will continue to tap the corporate and assessing funding sourcesbond market in 2012 and we also expect to see a further increase 4. Investing capital: strengthening investment appraisalin the use of alternate financing sources such as sovereign wealth and transaction executionfunds, private wealth and strategic partnerships using optionssuch as off-take arrangements. To view our Global Capital Confidence Barometer: Mining & Metals, go to the increased preparedness to do deals, it is unlikely thatbigger deals will be entirely financed by bank debt in the shortterm. Companies may be returning to deal making but there willbe a lag before banks return to megadeal M&A. This means that 2011 trends, 2012 outlook 9
  10. 10. 10Executivesummary Mergers & Acquisitions Trends, drivers and M&A values and volumes Commodity analysis Regional analysis
  11. 11. “Despite continuing global economic uncertainty, the value of M&A activity in the mining and metals sector during 2011 reached its highest levels since the peak of 2007, proving the importance of acquisitions to the sector’s overall growth agenda.” Lee Downham Global Mining & Metals Transactions Leader Ernst & Young, United KingdomTrends, drivers and M&A valuesand volumeIn 2011, we saw extreme market turbulence and volatility, with and the prospect of closing deals. However, the global economiceconomic uncertainty rivalling the early days of the 2008 global backdrop and heightened market volatility made it tough forfinancial crisis. Fears of a double-dip economic slowdown in the management to both evaluate and execute M&A. As a result,US were heightened by concerns of a financially driven crash in many potential acquirers showed a high level of caution in theEurope and compounded by lower Chinese short term growth latter part of the year. Despite uncertainty, 1,008 deals with aprospects. total value of $162.4b were completed in 2011.Despite this, mining and metals companies demonstrated Historically, deal value has been driven by high-value megadealscontinued confidence and desire for inorganic growth. We (>$1b). Looking back to 2006/2007, a small number of largeobserved M&A being weighed up against the value of investing in megadeals drove incredibly high deal values. By contrast, in 2009organic growth and returning cash to shareholders via dividends we saw far fewer megadeals.or share buybacks. Market turbulence created opportunities to While the $10b plus deals remain elusive, in 2011 there were 28acquire quality assets at depressed prices, at times promising to megadeals which drove growth, and at $106.6b they accountedcreate greater value than building new mines or returning cash for two thirds of deal value. While there was capacity to transact,to shareholders. The preferred assets were generally large and management were understandably uncomfortable to execute onlow-cost, and could be taken on without negatively impacting a transformational deals that would put balance sheets under thecompany’s credit rating. kind of strain experienced prior to the global financial crisis ofLow gearing, strong earnings and good capital availability created 2008/ opportunistic environment for M&A in the first half of 2011.Executives showed they were positive about deal opportunitiesVolume and value of deals (2000–2011) 2010-2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GrowthVolume 392 380 475 475 596 564 701 903 919 1,047 1,123 1,008 -10%Value ($m) 38,747 66,745 56,347 46,182 26,350 65,430 175,713 210,848 126,884 60,035 113,706 162,439 43%Average 99 176 119 97 44 116 251 233 138 57 101 161 59%value ($m)Median 8.9 5.9 5.0 4.4 3.1 4.8 6.2 7.2 6.0 3.2 5.2 5.6 9%value ($m) 2011 trends, 2012 outlook 11
  12. 12. “Our analysis shows that the majors are ready to transact for the right opportunities, particularly those that add materially to long term growth.” Natasha Johns Senior Analyst, Mining and Metals Ernst & Young, AustraliaMegadeals (2011) Value Type Target Target Target Acquirer Acquirer Stake Acquirer commodity ($m) country commodity country (%)1 11,776 Cross border Petrohawk Energy US Oil & gas BHP Billiton Australia 100.0 Diversified2 8,391 Domestic Polyus Zoloto Russia Gold KazakhGold Group Russia 73.0 Gold3 8,178 Domestic Silvinit Russia Potash/ Uralkali Russia 100 .0 Potash/phosphate phosphate4 7,359 Cross border Equinox Minerals Zambia Copper Barrick Gold Canada 100 .0 Gold5 7,165 Domestic Massey Energy US Coal Alpha Natural Resources US 100 .0 Coal6 5,499 Cross border Polimetall Russia Gold Polymetal International Jersey 83.0 Gold7 5,390 Cross border Anglo American Sur Chile Copper Mitsubishi Japan 25.0 Trading company8 4,949 Cross border Macarthur Coal Australia Coal Peabody Energy US 100.0 Coal9 4,948 Cross border Vale — Aluminium Operations Brazil Aluminium Norsk Hydro Norway 100.0 Oil & gas10 4,750 Cross border Chesapeake Energy — assets US Oil & gas BHP Billiton Australia 100.0 Diversified11 4,112 Cross border Consolidated Thompson Iron Canada Iron ore Cliffs Natural Resources US 100.0 Iron ore Mines12 3,908 Cross border Riversdale Mining Mozambique Coal Rio Tinto UK 100.0 Diversified13 3,527 Cross border Western Coal Canada Coal Walter Energy US 100.0 Coal14 3,473 Domestic International Coal Group US Coal Arch Coal US 100.0 Coal15 2,689 Domestic Cairn India India Oil & gas Vedanta Resources India 18.0 Diversified16 2,129 Domestic Fronteer Gold US Gold Newmont Mining US 100.0 Gold17 1,950 Cross border CBMM Brazil Niobium China Niobium Investment (CITIC, China 15.0 Steel Baosteel, Anshan Iron & Steel and TISCO)18 1,913 Cross border Bumi Resources Indonesia Coal Vallar UK 25.0 Investment company19 1,836 Cross border Ivanhoe Mines (Oyu Tolgoi) Mongolia Copper Rio Tinto UK 49.0 Diversified20 1,762 Cross border Berau Coal Energy Indonesia Coal Vallar UK 85.0 Investment company21 1,612 Domestic Coal & Allied Industries Australia Coal Hunter Valley Resources (Rio Tinto Australia 100.0 Diversified and Mitsubishi)22 1,524 Cross border Drummond — Colombian Colombia Coal Itochu Japan 20.0 Trading company operations23 1,514 Domestic Northgate Minerals Canada Gold AuRico Gold Canada 100.0 Gold24 1,391 Cross border Metorex South Africa Gold Jinchuan Group China 100.0 Diversified25 1,360 Domestic Inner Mongolia Yindu Mining China Nonferrous Weida Medical Applied Technology China 63.0 Medical metals26 1,192 Domestic Severstal North America — US Steel The Renco Group US 100.0 Steel operations27 1,171 Cross border Ventana Gold Colombia Gold AUX Canada Acquisition Inc Brazil 100.0 Investment company (EBX Group)28 1,127 Domestic Vale Fertilizantes Brazil Potash/ Vale Brazil 99.0 Diversified phosphate12 Mergers, acquisitions and capital raising in mining and metals
  13. 13. 01 | Mergers & AcquisitionsThere was a diverse range of drivers for megadeals. A number of expanded into oil/shale gas to further strengthen its portfolio instrategic, synergistic deals were completed domestically, whilst order to withstand greater risk and maximize growth opportunities.others looked to use M&A to diversify both out of a commodity Only the largest players are able to justify such major strategicfocus and also geographically. For example, in 2011, BHP Billiton shifts to shareholders.Value and volume of deals by size (2000–2011) Share of deal volume by size (2007–2011) 250 1,200 100% 1% 3% 2% 3% 4% 200 1,000 5% 95% 800 8% 8% 9% Volume 150 7%($b) 600 90% 100 400 94% 50 200 85% 90% 89% 89% 88% - 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 80% 2007 2008 2009 2010 2011 <$200m Between $200m and $1b <$200m Between $200m and $1b > $1b > $1b Volume Outside of the megadeals, the key theme of 2011 wasShare of deal value by size (2000–2011) transacting with minimal risk. Deal drivers were synergies, 100% bolt-on growth and acquisitions that enabled companies to utilize competitive advantages. Sensible, low risk transactions were the 80% 39% order of the day. 51% 62% 66% Mid-tier and junior level producers continued to acquire 60% 79% companies and projects in 2011, looking to bolt-ons to increase scale and improve their ability to access capital. We observed a 40% 38% number of companies continuing to streamline and unlock value 33% 25% from asset portfolios, divesting less economical, small scale and 20% 24% 14% higher cost assets. 23% 13% 16% 10% 0% 7% As companies continue to strive to deliver better value to 2007 2008 2009 2010 2011 shareholders, we expect to see more divestments of low margin, downstream assets such as Rio Tinto’s announcement that it <$200m Between $200m and $1b > $1b intends to sell some of the smaller, higher-cost assets in its Rio Tinto Alcan division, along with smelting and refinery assets in Europe and the US1.1 Rio Tinto to shore up its net cash position from asset sales, The Australian,19 October 2011. 2011 trends, 2012 outlook 13
  14. 14. “Increasingly there is acceptance that high volatility will exist for some time yet and mining and metals companies are looking at new ways to transact in this volatile environment.” Michael Elliott Global Mining & Metals Leader Ernst & Young, AustraliaFurther, we expect to see the majors refine their portfolios to Target destination by risk level (2009–2011)focus on margins rather than a race for production as we saw 100%pre-global financial crisis. BHP Billiton’s announcement that its 13% 22% 25%diamond operations in Canada may be entirely or partly sold2 is a 80%good example of this strategy. Share by value 37% 22% 60% 46%While still dominating in volume terms, the number of <$200mdeals fell from 1,015 in 2010 to 892 in 2011, and their value fell 40% 53%from $18.1b to $16.9b. It is not clear why there has been such 50% 20% 32%a significant drop in volume of <$200m deals but perhaps thisis due to seller expectations. With prices depressed for much of 0% 2009 2010 2011the year and no desperate need to sell up, most juniors probablydecided to ‘sit out’ the current market volatility. High risk Medium risk L ow riskRisk management was again at the heart of a number ofcompanies’ decisions about investment locations. With increasing A significant number of domestic deals were completed in Northlevels of resource nationalism and greater underlying commodity America, primarily as a result of domestic coal consolidation.movements, sensitivity to single country and single commodity These deals had clear synergies, were conducted in anfocus put pressure on many companies’ share prices. environment where buyers had strong knowledge of markets andResource nationalism continued to be a key concern among regulations, and were therefore a low-risk way of growing throughmining executives, with rising government demands for higher leveraging a unique competitive advantage.taxes and royalties raising uncertainty in M&A investmentdecisions. In 2011, we saw more than 25 countries change their Share of domestic and cross border deals (2000–2011)fiscal environment. Resource nationalism places a large cost 80%burden on mining and metals companies and can influence the 70%decision of where to invest in a particular country. While some 60% Share by volumegovernments managed the changes quickly and efficiently, a 50%number of others did not, resulting in a slowdown in investment 40%decisions. 30% 20%In 2011 we witnessed an interesting development, with more 10%deals being done in both high risk3 and low risk nations. This 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011is likely a result of increasing resource nationalism. So manycountries have announced reviews in resource policy that riskdifferentials across developed, emerging and frontier economies Share of domestic Share of cross borderhave narrowed such that the middle ground is no longer asappealing to executives from a risk reward perspective. In emerging and frontier nations, companies were more prepared2 to take on the greater levels of risk given the potentially higher Review of diamonds business, BHP Billiton press release, 30 November 2011.3 The risk level is based on IHS Global Insight’s country risk rating system that returns. These deals tended to be smaller in size, suggestingcontrasts the investment climate in 203 countries. The system separately rates that companies were more prepared to take on higher risks if thethe political, economic, legal, tax, operational and security environments in eachcountry to provide a comprehensive picture of the quality of conditions and level stakes were lower.of stability encountered by investors in each country. The principal quality theseratings measure is stability.14 Mergers, acquisitions and capital raising in mining and metals
  15. 15. 01 | Mergers & Acquisitions Definitions of developed, emerging and Commodity analysis frontier nations Uncertainty about economic growth resulted in a number of Developed markets major mining and metals price corrections during the year. are those countries that are thought to be most developed While appetite to do deals was strong, alignment of valuation and therefore less risky. They are high income economies, expectations proved incredibly difficult to achieve with such with a developed market and regulatory environment. volatility in commodity prices. The question to consider now Emerging markets is whether commodity prices are beginning to adjust to a new are nations with social or business activity in the process normal, or whether the recent economic challenges have simply of rapid growth and industrialization. In this analysis, we tempered the super cycle? have extracted Brazil, Russia, India and China (BRIC) from Bulks and metals price performance (2010–2011) Morgan Stanley’s Capital International Capital Index of emerging markets. 170 Frontier markets are a subset of emerging markets. They have lower market 150 capitalization and liquidity than the more developed emerging Indices rebased to 100 at 1 Jan 2011 markets. 130 Where countries do not appear in these indices, we have used the above definitions to categorize them. 110Share of domestic and cross border deals by target country type (2011) 90 100% 68% 65% 21% 16% 80% 70Share by volume 84% 79% 60% 50 40% 2010 2011 32% 35% 20% Aluminium Nickel Silver Iron ore 0% Copper Gold Thermal coal BRIC Developed Emerging Frontier Source: Thomson Datastream Cross border Domestic 2011 trends, 2012 outlook 15
  16. 16. Value of deals by targeted commodity (2011) Coal regained its lead as the commodity with the highest deal value in 2011, accounting for $41.4b, up from $17.9b in 2010.($m) Coal 41,351 This activity was primarily driven by major players looking to Gold 34,495 boost production capacity to meet increasing demand from China and India. It was also due to large power utilities and steel Copper 19,802 companies, often with government backing, integrating upstream Oil & gas 19,540 raw materials to manage volatility and long term security of supply. This clearly demonstrates confidence in coal over the lifePotash/phosphate 10,430 of existing mines, despite the rising tide of climate change policies Iron ore 8,881 and regulation. Steel 7,262 Record sector cash margins and a positive medium term outlook for the gold price meant companies with a primary interest in Aluminium 6,479 gold were the most sought after M&A target by volume. In 2011, Silver lead zinc 3,621 there were 385 gold deals representing 38% of all deals in the sector by volume. In contrast with other commodities, the global U ranium 1,627 economic uncertainty, low (or negative) real interest rates and Other 8,951 a weak US dollar supported the price of gold as a safe-haven asset, which in turn augured well for M&A in the gold sector. The principal drivers of gold M&A remain strategic as opposed toVolume of deals by targeted commodity (2011) opportunistic. Replacing reserves is becoming more challenging for major producers as operations mature and grades decrease. Gold 385 The majority of gold targets were junior mining projects, and with gold equities lagging the price of gold, these targets offered good Coal 138 value in 2011. Confidence in sustained higher gold prices allowed acquirers to take on more risk (especially political risk) and to Copper 75 diversify into more copper production. Iron ore 63 Looking into 2012 and beyond, we expect to see more activity Silver lead zinc 57 in steel, a sector that remains more fragmented than other metals and looks poised for further consolidation. A deal in the Steel 40 pipeline for February 2012 is the merger of Nippon Steel and Sumitomo Metal Industries, worth $9.4b, which will create the U ranium 30 world’s second largest steel maker behind ArcelorMittal. While stillRare earths lithium 26 speculative at this stage, consolidation in the potash sector could be another big story in 2012. Potash/phosphate 21 Oil & gas 16 Other 15716 Mergers, acquisitions and capital raising in mining and metals
  17. 17. 01 | Mergers & AcquisitionsRegional analysis for raw materials from the Asia-Pacific region (China, South Korea and India) has accelerated growth in mining asset ownership.Mining companies were once the primary domain of countries This longer term trend notwithstanding, significant consolidation,such as Australia, South Africa, the US and Canada. However, particularly in coal, and BHP Billiton’s investments in USas high prices and strong demand have facilitated supply from oil/shale gas assets, saw North America take the lead as theemerging nations, these traditional mining countries’ domination favored destination for M&A in 2011.of mining assets has shrunk. At the same time, increased demandValue of deals by target region (2006–2011)Market share 2006 2007 2008 2009 2010 2011 2010–2011(by proceeds $m) growthNorth America 83,642 143,369 48,520 15,420 22,200 54,187 144%Asia-Pacific 13,242 18,045 29,611 20,505 38,955 38,297 -2%CIS 15,549 3,040 3,553 3,836 3,718 23,894 543%Latin America 6,156 16,147 16,924 12,139 23,957 22,084 -8%Africa 8,480 7,271 1,844 3,285 16,657 20,282 22%Europe 48,113 22,976 26,432 4,608 6,613 3,564 -46%Middle East 530 - - 242 1,605 131 -92%Total 175,713 210,848 126,884 60,035 113,706 162,439 43%Value of deals by acquiring region (2006–2011)Market share 2006 2007 2008 2009 2010 2011 2010–2011(by proceeds $m) growthAsia-Pacific 10,449 18,965 46,148 20,197 49,688 58,924 19%North America 41,773 77,886 35,057 13,661 35,481 48,964 38%Europe 73,922 90,084 24,074 11,182 7,528 28,438 278%CIS 16,620 12,348 13,015 5,248 4,196 19,457 364%Latin America 23,801 7,653 8,079 8,181 14,799 3,987 -73%Africa 7,561 3,526 511 1,419 1,480 2,437 65%Middle East 430 375 - 72 533 231 -57%Unknown 1,158 12 - 75 - - -Total 175,713 210,848 126,884 60,035 113,706 162,439 43% 2011 trends, 2012 outlook 17
  18. 18. North America Latin AmericaM&A activity in North America picked up significantly in 2011, with Outward investment by Latin America fell during 2011, mainlythe value of acquisitions in the region increasing 144% to $54.2b. due to Brazilian companies reducing overseas’ investment andThis rise reflects an embedded confidence in the long term view concentrating on business opportunities within Brazil itself. Whileof raw materials demand across the emerging economies and the inbound investment slowed in 2011, the region remains a topopportunity delivered by depressed equity markets, as well as destination for exploration spending, despite sector challengeshistorically cheap and available capital. The strategic driver for and some political noise. While there is potential opportunity inmany North American deals was the need to achieve the scale the region, Latin America’s project portfolio is expected to requirenecessary to build a sustainable platform from which to seize a investment of some $236b over the next 5–10 years just forshare of growth markets outside the US. Consolidation, particularly project coal, among North American miners provided the largest sourceof transactions, but international acquirers, particularly from Asianconsuming countries, were also important. Commonweath Independent States (CIS)Asia-Pacific CIS experienced the highest year on year growth, with dealsMany nations within the Asia-Pacific region battled inflation targeting CIS assets up 543%, with a value of $23.9b. The bulkconcerns in 2011. China’s M&A activity was constrained by a of this increase came from consolidation within the region. Infirmer focus on value, driven by a combination of domestic political the potash sector, Silvinit and Uralkali merged to create a singleand economic pressures and a more mature approach to deal national champion and one of the largest controllers of potashmaking. With the slowdown of China’s manufacturing economy in the world. Another deal of note in the region was the mergerand tightening monetary settings, China demonstrated a new between Russia’s leading gold producer Polyus Zoloto and itscaution to M&A activity. Tellingly, two Chinese-listed entities — subsidiary KazakhGold, making it a top 10 gold player.Minmetals Resources and Yanzhou Coal Mining — walked away fromsizeable transactions due to valuation concerns. In contrast, manyIndian companies demonstrated increased bullishness towardstransacting, with a number of significant deal wins in the region,notably for coal assets in Australia. We observed that the mostsought after commodities in the Asia-Pacific region in 2011 werecoal, iron ore and gold.EuropeThe Eurozone crisis impacted economic health in many Europeancountries, with governments across the region deploying policylevers to maintain at best economic growth, and at worsteconomic stability. However, mining and metals companiescontinued to transact, with the value of deals up 278% to $28.4b,the highest since the 2007 peak. The largest acquisition from thisregion was completed when Norsk Hydro of Norway acquired the 4 Mining Intelligence Series: Outlook 2012, BNAmericas, October 2011.aluminium operations of Vale for $4.9b.18 Mergers, acquisitions and capital raising in mining and metals
  19. 19. 01 | Mergers & AcquisitionsM&A outflows for key nations 11,164 17,159 680 1,200 6,239 12,459 2,246 387 745 Russia 7,971 U K Canada 117 486 U kraine U S 537 1,836 Mongolia 630 France 267 851 16,603 China 9,079 9,199 14,961 16,549 99 5,618 Japan 133 Mexico Colombia 130 Nigeria 293 1,524 Tanzania 3,726 Brazil 1,980 7,359 981 Indonesia Peru Z ambia 417 Mozambique 730 698 231 3,908 Namibia 2,903 Australia 5,934 Chile 512 6,892 590 574 2,592 South Africa 19,063 6,114 Domestic (bubble size = deal value) Outbound (bubble size = deal value) 2011 trends, 2012 outlook 19
  20. 20. 20 Capital raising IPOs Follow on issues Convertible bonds Bonds Loans
  21. 21. “Capital raising in 2011 was characterized by a fragile combination of caution and opportunism.” Emily Colborne Senior Analyst, Mining and Metals Ernst & Young, United KingdomIn 2011, major producers were generally able to access capital The question, of course, is how this balance sheet strength willwith relative ease, sourcing finance with lower average borrowing be used. Clearly there is capacity to finance major, dare wecosts and longer tenors. A record $84b of corporate bonds were say transformational, deals, but these are likely to be limited.issued and $187b of bank loans borrowed. The focus was not Our view is that much of the re-financing has been good,aggressive re-leveraging but clever re-financing. A high level of opportunistic treasury management, providing the majorcaution underpinned capital allocation decisions, meaning many producers with agile balance sheets that can be used for sizeablecompanies entered 2012 with credit rating strength and capacity M&A of the right deal, or deals, that come gear up for future acquisitions. However, as 2011 progressed, risk aversion took hold, equityMany economies focussed on maintaining low interest rates, stalled, the high yield market effectively closed, and the pre-which afforded opportunities for low cost borrowing, at the production junior sector looked set to pay the price. Junior IPOssame time as increasing demand for higher yield investments — a slowed over the second half, with average proceeds falling toperfect storm for the high growth, high risk, capital intensive $7m, while companies suffered heavy, indiscriminate share pricemining and metals sector. We observed opportunistic exploitation falls, seeing them head in to 2012 facing greater difficulty inof favorable debt market conditions, enabling the mid-tiers, often accessing capital.for the first time, to raise debt capital for acquisitions.Capital raising by asset class — proceeds raised Capital raising by asset class — number of issuesProceeds ($m) 2007 2008 2009 2010 2011 Change 2007 2008 2009 2010 2011 ChangeIPOs 21,400 12,406 2,987 17,948 17,449 -3% IPOs 280 117 70 177 145 -18%Follow ons 66,802 48,751 73,806 49,705 49,745 0% Follow ons 2,340 1,948 2,914 3,115 2,464 -21%Convertibles 12,865 12,238 14,431 5,477 2,365 -57% Convertibles 81 78 97 74 73 -1%Bonds 36,358 38,146 61,016 72,502 83,804 16% Bonds 108 140 150 186 174 -6%Loans 110,787 171,691 62,420 183,875 187,059 2% Loans 83 268 178 247 294 19%Total 248,212 283,232 214,660 329,507 340,422 3% Total 2,892 2,551 3,409 3,799 3,150 -17% 2011 trends, 2012 outlook 21
  22. 22. Capital raising by proceeds (2007–2011) 350 300 250 200($b) 150 100 50 0 2007 2008 2009 2010 2011 L oans Bonds Convertibles Follow ons IPOsTop 30 issues (2011) Asset class Issuer (parent name) Nation Commodity Total proceeds ($m) Cumulative share of total industry proceeds 1 Loans Glencore International United Kingdom Diversified 11,875 3% 2 IPO Glencore International United Kingdom Diversified 10,048 6% 3 Loans ArcelorMittal Luxembourg Steel 10,000 9% 4 Loans United Company Rusal Russia Aluminium 9,330 12% 5 Loans BHP Billiton Australia Diversified 7,500 14% 6 Loans Xstrata United Kingdom Diversified 6,000 16% 7 Loans Arch Coal United States Coal 5,800 18% 8 Loans Cliffs Natural Resources United States Iron ore 5,450 19% 9 Loans Barrick Gold Canada Gold 5,000 21% 10 Bonds Barrick Gold Canada Gold 4,000 22% 11 Bonds Rio Tinto United Kingdom Diversified 4,000 23% 12 Loans Alcoa United States Aluminium 3,750 24% 13 Loans Vedanta Aluminium India Aluminium 3,642 25% 14 Follow ons Gerdau Brazil Steel 3,142 26% 15 Bonds Peabody Energy United States Coal 3,100 27% 16 Bonds Xstrata United Kingdom Diversified 3,000 28% 17 Bonds BHP Billiton Australia Diversified 3,000 29% 18 Bonds ArcelorMittal Luxembourg Steel 3,000 30% 19 Bonds POSCO South Korea Steel 2,883 31% 20 Follow ons Hebei Iron & Steel China Steel 2,521 32% 21 Bonds Shougang Group China Steel 2,350 32% 22 Bonds China Coal Energy China Coal 2,349 33% 23 Follow ons ThyssenKrupp Germany Steel 2,342 34% 24 Bonds Arch Coal United States Coal 2,000 34% 25 IPO Jastrzebska Spolka Weglowa Poland Coal 1,946 35% 26 Follow ons Molycorp United States Rare earths 1,363 35% 27 Follow ons Arch Coal United States Coal 1,315 36% 28 Follow ons Wuhan Iron & Steel China Steel 1,275 36% 29 Follow ons Ivanhoe Mines Canada Diversified 1,180 36% 30 Follow ons Minera Frisco Mexico Diversified 982 37%Loan proceeds include refinancing and amendment of existing debt, as well as new issues.22 Mergers, acquisitions and capital raising in mining and metals
  23. 23. 02 | Capital raising “Global equity markets were weighed down by volatility and uncertainty over much of 2011, stifling growth opportunities for companies seeking to go public for the first time.” Nicky Crabtree Assistant Director, Mining and Metals Transactions Advisory Services, United KingdomIPOs The long-anticipated IPO of Glencore on the London Stock Exchange (LSE) was the exception, accounting for nearly 60%The challenging market conditions made their biggest impact at of IPO proceeds raised by the sector, and taking up a significantthe larger end of the market in 2011, with proceeds, excluding share of already-squeezed capacity among London equitythe IPO of Glencore, down 59% on 2010 and a record number of investors. Glencore’s secondary listing on the Hong Kong StockIPOs postponed and remaining firmly in the pipeline. Exchange (HKSE) confirmed the importance of gaining access to local markets of demand and the increasing role the HKSE isIPO volume and proceeds (2007–2011) playing in the sector. 25 300 20 250 Primary exchange of IPO (2011)Proceeds ($b) 200 Volume 15 L ondon 10.8 150 10 100 Warsaw 2.1 5 50 Hong K ong 1.3 0 0 Shanghai 0.5 2007 2008 2009 2010 2011 Proceeds ($m) Glencore Volume Vienna 0.5 Other 2.2The fear of slowing industrial growth in key metal consumingnations saw resources stocks bear the brunt of risk aversion, 0 2 4 6 8 10 12underperforming the metals prices, and bearing little relation to Proceeds ($b)company or industry fundamentals. Volatility and the uncertainoutlook for metals made pricing of new issues difficult. We saw The Australian, Toronto and AIM exchanges took the dominantinvestors preferring to place their bets on lower risk investments, share of IPO volume, respectively, driving a year on year increasewhile boards shied away from the heightened risk of mispricing in IPOs over the first half. However, deteriorating marketand the short-term value destruction caused by poor after-market conditions in the second half led to an 18% decline in volume forperformance. the full year. Average junior IPO proceeds across those threePerformance of mining and metals equity indices vs metal prices (2011) exchanges were low at just $8m (compared with $21m in 2010). 110 For juniors, an IPO represents a platform from which to access capital over the long term. The initial fundraising in these climatesIndices rebased to 100 100 90 was often a smaller issue than management would ideally have at Jan 2011 liked, but it importantly put the company and its assets 80 ‘on the map’. 70 60 50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec FTSE All-Share Mining S&P/ASX 300 Metals & Mining S&P/TSX Metals & Mining FTSE AIM Basic Resources L ME IndexSource: Thomson Datastream 2011 trends, 2012 outlook 23