London, 7 September 2011

PwC report: China well positioned to make opportunistic buys and lead a rebound in global mining M&A. Signs point to a slowdown in global mining mergers and acquisitions (M&A) in the second half of 2011 after a strong start to the year. Deal values and volumes have already decreased by 32% and 19% month on month in July, and a further 25% and 7% respectively in August, according to PwC’s new Mining Deals report released today.

In the first half (H1) of 2011, 1,379 deals worth US$71 billion were announced, making it the busiest half year of M&A in the mining sector’s history. On an annualised basis, deal volumes and aggregate values were 24% and 2% higher than 2010, and 122% and 32% higher respectively than 2009. Average deal values during H1 2011 were $104 million—40% higher than 2010. For the remainder of 2011, however, jittery global equity markets will likely put downward pressure on most mining company valuations for the near term.

Tim Goldsmith, global mining leader, PwC, said: “For the time being, politics have taken commodity markets hostage. Although a drop off in deal-making is expected, it will not cease altogether as China’s demand for metals, supported by other emerging nations, continues to drive long-term fundamentals and is the most critical factor in formulating the commodity market and, therefore, mining M&A expectations.”

All quiet on the Western front

Despite record overall activity during H1 2011, the usual deal-makers from Canada, Australia and the UK were quiet. There was however, a flurry of activity led by US buyers, especially in the coal sector. In H1 2011, US entities overtook Canadian entities as the most acquisitive buyers with 31% market share by value in announced acquisitions. With 19% market share by value, Canada was bumped to second place, while typically acquisitive Australia stood at only 4%.

Steelmaking ingredients dominate

Steelmaking ingredients – notably metallurgical coal and iron ore - dominated deal making activity during H1 2011 with over 30% of activity. Coal surpassed gold as the most targeted resource by aggregate deal value as company’s sought to consolidate their resources to increase exposure to the raw material needs of the emerging markets. A key threat for western buyers in closing deals, however, stems from increasing shareholder and board pressure to deploy capital into organic growth or share repurchases and dividends.

Commodity outlook

Commodity prices will remain high going forwards.  This is driven by the demand from the emerging nations (led by China), plus continuing supply challenges leading to a shortage of supply to meet demand. Adding in significant cost pressures, prices will never go back to historical averages (even on a real basis).

China quiet in 2011, but poised to capitalize on opportunistic downturn

In H1 2011, Chinese entities announced 75 acquisitions worth US$4.7 billion (excluding cancelled and withdrawn deals), a decrease of 18% over the prior year. When active, Chinese entities stayed close to home, with 68% of acquisition targets headquartered in Asia/Pacific emerging markets. Lacklustre Chinese buy-side volumes were not for lack of desire as evidenced by two notable takeover attempts of Australia’s Equinox Minerals and Whitehaven Coal that both failed on valuation grounds.

China is expected to continue acquiring gold and other precious metals, as well as quality industrial resource assets like iron ore, metallurgical coal, fertilizer minerals and base metals. PwC also anticipates China will continue to focus on frontier markets, such as Mongolia and Africa, and further consolidate its fragmented domestic mining sector.

Tim Goldsmith, global mining leader, PwC, said: “China walking away from two potentially iconic transactions due to valuation concerns was rather symbolic and further dispels the notion that Chinese entities operate in favour of securing supply at any price.

“We witnessed many instances of Chinese entities managing for profit, not supply, through 2011. Going forward, we expect that political and economic forces within the country  will incite continued discipline in buy-side M&A activity - Chinese buyers have been quietly amassing minority positions in many companies and they are now going to start exercising their influence, especially if there is an opportunistic downturn.”

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