The year of the 'no deal' in mining sector says PricewaterhouseCoopers report

As well as being a year of very high deal activity, 2008 was also the year of what might have been. The potentially sector transforming bid by BHP Billiton grabbed the headlines but there were many other announced transactions that did not complete.

The most significant surge in deal activity came in Brazil with total deal value in South America as a whole rising dramatically from US$ 8.7bn in 2007 to US$ 22.8bn in 2008. US $17.7bn of the region’s deal value was in Brazil – up nearly fivefold from the US$ 3.6bn total Brazilian mining deal value of 2007.

A large increase was also seen in deals involving Chinese buyers with the value of deals rising fourfold from US$ 6.7bn in 2007 to US$ 25.5bn in 2008. This trend is continuing and, in fact, increasing in 2009 with deals announced in February by Chinalco (a $19.5 billion transaction with Rio Tinto), China Minmetals (a $2.5 billion bid for Oz Minerals) and Hunan Valin ($0.9 billion investment in Fortescue).

Kameswara Rao, PricewaterhouseCoopers’ India Leader for Energy, Utilities & Mining, comments:

“We see a unique environment that will reshape much of the sector’s ownership. The rapid decline in commodity and equity prices, combined with the financing constraints with the global credit crisis, has left the sector polarised between the strong and the weak.”

“Indian mining and user industries have an unprecedented window of opportunity to gain access to targets that might be denied to them in normal circumstances. The raw material supply constraints are likely to persist in the Indian market, and as Indian mining operators are more closely integrated with end-use, the current lower valuations help then secure cheaper supplies for future. This may be just what the local brave hearts are looking for.”

Mining Deals* 2008 highlights how the industry experienced a ‘violent downward tailspin’ in the space of a few months, turning much of the deal-making in the sector upside down:

§ Deal volumes plummeted 61% in the fourth quarter of 2008 towards levels last seen in 2005.

§ Many companies that had spent the earlier part of the year doing deals or resisting unwelcome overtures finished the year looking at overstretched balance sheets, preparing for write downs, and welcoming back potential buyers with open arms.

With regard to developments in the Indian market, Kameswara Rao said:

“We expect the constraints and contrasts in the market will create their own impetus for deal activity. Companies with required resources see in the current environment a buying opportunity although many may be content to bide their time for the right conditions to emerge. The state owned entities have the balance sheet strength but must work on their assessment and decision-making processes.”

“The boom period has attracted a number of small to mid-cap mining companies for whom access to equity and debt has dried up. Many are at an entry or development stage and now risk survival. This is a good opportunity for the Government to further liberalise the domestic mining industry to grow it, attract investment, and reduce costs for user industries such as in metals and energy.”

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Notes for editors:

Methodology: Mining Deals 2008 is based on published transactions from the Dealogic ‘M&A Global’ database, December 2008. Analysis encompasses announced deals, including those pending financial and legal closure and those which are completed. Deal values are the consideration value announced or reported including any assumption of debt and liabilities. Figures relate to actual stake purchased and are not multiplied up to 100%. The geographical split of the deals refers to the location of the purchased asset(s). Where this is not clearly identified or relates to multiple geographical regions, the deal region is stated based on the location of the target company. The analysis relates to the extractive mining sector and therefore excludes related sectors such as the steel industry and metals trading sectors. The sector and subsectors analysed include: precious metals (e.g. gold, silver, and platinum), base metals (e.g. iron ore, nickel, copper, and aluminium), diversified (companies with a wide range of mining activities across subsectors) and other (includes coal, uranium, mineral sands, and mining services). Throughout the report, both for 2008 and previous years, we classify the Russian Federation, Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, Tajikistan and Armenia as ‘Russia and the Commonwealth of Independent States (CIS)

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