It's likely that Mick Jagger and Keith Richards had other things on their minds while crafting "You Can't Always Get What You Want", the Rolling Stones' 1969 classic, but we can't think of a more fitting theme for mining M&A in 2010 and, more importantly, for the decades ahead. The bottom line is that, with the world's population estimated to reach 8.3 billion by 2030 amid fears of a fleeting supply of resources, there may not be enough to go around. Someone, somewhere, may be disappointed.
With this in mind, Mining Deals 2010 revisits Mining M&A in 2010. Our report sets out the winners, losers and those waiting in the wings.
1. Number of transactions at all time high. Aggregate dollar values post impressive annual gains, but "mega deals" remain elusive.
The numbers are in—2010 results prove that the first decade of the millennium belongs to the mining sector! We tracked 2,693 global mining M&A deals worth $113 billion in 2010, bringing the decade total to over 11,000 transactions worth close to $785 billion. No other global industry sector has experienced comparable growth rates or volumes. In 2010, the largest deal in our analysis was Newcrest's $8.7 billion acquisition of Lihir Gold. The $10 billion "mega deal" threshold was not breached.
2. Buyers extend geographic reach to acquire five key resources.
Nearly all mining sub-sectors were busy from a deals perspective through 2010 but five key resources dominated M&A. Mines with a primary resource of gold, copper, coal, fertilizer minerals or iron ore represented 88% of aggregate dollar values in 2010. In many instances, demand for key resource projects was so voracious that miners penetrated regions with higher political risk profiles.
3. Canada and Australia governments look inward. Canadian and Australian corporates look outward.
2010 will undoubtedly go down as the year in which the most talked about mining issue was a matter of philosophy—who should benefit from resources imbedded in national soil— citizens or shareholders? The BHP Billiton/Potash Deal and Australia's MRRT tax were largely behind these conversations.
While national interests in Canada and Australia were raising concerns about resource ownership, corporations in Canada and Australia were busy buying foreign assets. In somewhat of a "hollowing in", Canadian owned entities completed 236 acquisitions of foreign targets worth $8 billion while Australian owned entities completed 109 acquisitions of foreign targets worth $9.7 billion.
4. High profile bidding wars see some buyers left out or having to boost purchase price.
Protectionist sentiment was not the only thing preventing mining deals from getting done. 2010 was a seller's market. A number of acquirers failed in their acquisition attempts, or were prompted by shareholders and/or boards to retreat and return with better terms.
5. China's role in global M&A overstated. Australia, Canada and Developed Europe dominate global buy-side activity.
2010 saw continued buy-side activity by Chinese entities with 161 acquisition announcements worth close to $12 billion. Chinese led M&A is indisputably notable considering that Chinese buyers were negligible players in mining M&A only five years ago. However, few Chinese buyers have successfully secured controlling stakes in world leading mining companies. Rio Tinto and Xstrata alone completed more acquisitions (in value terms) in the 2000-2010 period than all Chinese buyers cumulatively. Consider that while Chinese buyers were at the table in only 6% of all global acquisitions in 2010, North American buyers had a 52% market share with Australian buyers representing 16% of all bids.
The notion that China is amassing control of global mining commodities supply via M&A is unfounded.
2011 M&A Outlook
2010 did indeed mark the end of a historic decade in mining dealmaking. While it remains to be seen if we will ever see another decade like it, we do think 2011 will be another recordsetting year for mining M&A. Our top five expectations are:
1. There will be a heightened pace of deal activity, especially in the "five key resources." Upward pressure on deal values may prompt seniors to deploy more capital for organic growth .
In a rush to secure resources against a macro backdrop of emerging world industrialization, global asset inflation and a depressed US dollar, miners will hasten their march forward into frontier geographies and into new and untested expanses. In addition to activity within the "top five" resource groups, during 2011 we also expect acquirers to seek out: junior rare earth projects, uranium projects and targets in complementary extractive industries, like shale.
We also expect that rising public company market capitalizations will lead to an expansion in deal size through 2011, with numerous mining deals breaching the $10 billion price point for the first time post-crisis. However, as deal targets become more expensive, the economics associated with organic growth may become more attractive.
2. Chinese entities will endeavour to earn a spot amongst the global mining elite.
As discussed in our 2010 coverage, while China has been an extremely active investor in global mining projects, it has yet to produce a diversified mining market leader to rival the likes of a BHP Billiton or a Rio Tinto. We believe that this will begin to shift in 2011. From an M&A perspective, we expect the Chinese to take a more aggressive approach to outbound M&A and also to develop and consolidate the fragmented Chinese mining sector.
3. Indian entities will seek to secure industrial resource supply via strategic M&A.
We think that Indian buyers will be more active on the M&A front in 2011. Because securing supply will be India's chief concern, many Indian-led deals will resemble typical China-led deals from the 2000-2007 period, often structured as private placements (debt or equity) with offtake or royalty agreements. We also expect that some Indian steel and power conglomerates will take toehold positions in larger iron ore or coal miners, continuing upon the trend of vertical supply chain integration we observed through 2010. Dealmaking will not be limited to the private sector; state-owned companies are also expected to be acquisitive overseas.
4. Frontier markets will be at the forefront of mining M&A. Understanding and managing political risk will be critical to deal success.
With limited assets in developed regions and soaring demand for resources, miners eager for growth have, and will continue to have few other options than to move into frontier markets – high risk regions with underdeveloped mining sectors. Frontier markets are not to be confused with broader emerging markets. The former are regions that have a relatively recent history of steady mining activity. Numerous emerging markets, like Peru, Chile and Brazil, have longer track records of inbound investments in the mining sector and many miners are well acquainted with the regional risks and rewards.
Our report includes a special insert by the Eurasia Group which further discusses political risk in relation to mining projects.
5. Increased stakeholder intervention to create closing hurdles.
Deal market forecasting is not just about where the deals will be and who will be doing them. Equally important for dealmakers is the question: how will deal processes change in 2011? We expect that the biggest change will stem from increased stakeholder criticism of the current direction of mining M&A, which can make closing a deal challenging and even increase integration challenges. To avoid deal disruptions due to stakeholder concerns, we anticipate that through 2011 mining companies will need to:
- improve collaboration with Non-Governmental Organizations (NGOs) in acquired project regions
- answer to the collective shareholder voice: and
- be aware that government stakeholders are becoming more active in the sector.
Our report provides data, deal examples and a deeper perspective on each of these trends and outlook points.
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