favourablelongterm undervaluedminingsectorcreating ...€¦ · july 2011 macarthur coal ltd...

Global Mining SectorM&A update

Autumn 2012

The slowdown in the Chineseeconomy has had a severe impacton the mining sector over the last12 months after almost a decadeof sustained growth. The industryfaces some difficult challengesover the next few years includinglabour and energy cost inflation,production delays, escalatingcapex costs as well as variousgeo-political risks.

However, the long-term industrialisation andurbanisation cycle of China and other emergingeconomies is on-going and will continue tocreate long-term favourable fundamentals forthe industry.

There were over US$52 billion of M&A dealsglobally in the first half of 2012 across thevalue range, with over US$6 billion involvingmid-market firms. With corporate balancesheets still strong, lower company valuations,fragmented commodity markets and pressureto address operational as well strategic issues,the conditions for M&A are very positive.

Favourable long termfundamentals

Lower valuationscreating attractiveM&A opportunities

“Many commodity marketsare highly fragmented andin need of consolidation.In Russia for example,we expect considerableacquisition activity withinthe coal industry across thewhole of the value chain”Nick Van Den BrulPartner, NorthStar Corporate Finance

Undervalued mining sector creatingM&A opportunities

Marius Kloppers, CEO ofBHP Billiton stated that“the trend is always towardconsolidation in industries,particularly the mining industry,where we consume theresources every day that

constitute the life blood”. When asked aboutfuture M&A he said “absolutely no doubt” thatBHP will do more transactions.

Chen Jinghe, Chairman ofZijin Mining Group, one ofChina’s largest gold andcopper mining groupsannounced this year that itwould spend 5.5 billion yuan(US$875 million) on

acquisitions, the bulk of which will be overseasgold and copper assets. The state-ownedgroup achieved an 18% rise in profits last yearand now has assets in Australia, Peru, Russiaand central Asia.

Cynthia Carroll, CEO of AngloAmerican, said that the currentsubdued sentiment incommodities would pass.“Short-term prospects for theworld economy havedeteriorated in recent months,

yet we see more resilient trends in the medium tolonger term. Long term supply constraints acrossmany commodities, combined with continuingindustrialisation trends in key growth marketsshould provide considerable support for prices”.

Consolidation Cross-border acquisitions Support for commodity prices

Global Mining Sector M&A update

2

Challenging capitalmarkets encouraging

M&A

Opportunitiesacross a maturingcommodity cycleOngoing industrialisation andunderlying commodity inflationarypressures will continue to boost themining sector despite market instabilityover the past 18 months.

China, which is the largest consumerof every major commodity except oil,where it is second, still has some wayto go to reach the levels of commodityconsumption per capita of the West(See Figure 1).

In the short to medium term, companiesthat have significant exposure to miningcarbon steel materials will benefit fromurbanisation development – China isexpected to account for 50% of worldsteel use in 2012. Longer term demand,in particular for late-cycle commoditiessuch as nickel and platinum, isinfluencing the current strategies of themajor mining companies, includingthe Chinese.

Few major new discoveriescausing resource depletion

There have been significant reductionsin capital expenditure, exploration anddevelopment during the last decade.

This has led to a relative scarcity in thenear-term commissioning of majorprojects across many minerals andcommodities. Production delays aswell as a demand driven period ofover-exploitation, have also depletedreserves of a number of importantminerals such as copper and gold.

Given current market pricing for miningstocks relative to the capital costs ofconstruction, which have significantlyincreased of late, there is a preferencenow to acquire productive assets.

Alternative capital sources required

The current capital markets aresomewhat challenging for both majorsand juniors. Whilst the majors have thebenefit of relatively strong cashpositions, the juniors/explorationcompanies are having to manage theirexploration spend and capital burn verytightly as their ability to access capitalon reasonable terms is limited.

The scarcity of both equity capital andbank project finance has created atrend toward alternative capital sources(e.g. royalty companies, private equity,sovereign wealth funds) and helpedcreate a more attractive environmentfor M&A, with more opportunities.

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China GDP:- $ 7.3k/capita

IndiaGDP:- $ 3.2k/capita

US GDP:- $ 42k/capita

Indexed at 100 for maximum

GDP per capita (real, 2005 $US)

Late cycle commoditiese.g., platinum, nickel

Mid cycle commoditiese.g., copper, lead, zinc

Early cycle commoditiese.g., steel, iron ore

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Nickel - Spot Close Price Platinum - Spot Close Price Aluminum - Spot Close Price

Figure 1: Commodity intensity Figure 2: Late-cycle commodity price development

Source: Xstrata Source: Capital IQ

Target Acquirer Deal ValueAnnounced Target Country Target Activities Acquirer Country (US$) Million

Pending African Barrick Gold UK/South Africa Gold mining in Africa China National Gold Group Corp. China 3,900

July 2012 Markray Corp USA/Russia Gold, silver and platinum mining ZAO GRK Zapadnaya Russia 175

July 2012 Satbor LLP Kazakhstan Mining potash and borate Sprint Capital Partners Hong Kong ND

June 2012 Ekaterinburg Non-Ferrous Russia Engages in mining of Renova Group Russia 16Metal Processing Plant precious metals

June 2012 Bakalskoye Mining Russia Engages in iron mining Atop International Group British Virgin NDDepartment Islands

June 2012 Allied Gold Mining PLC Australia Gold mining ST Barbara Limited Australia 619

May 2012 Wesizwe South Africa Platinum mining Jinchuan Group + China Africa China 227Development Fund

May 2012 Hebei Hua’ Ao Mining China Gold-zinc mining Griffin Mining Limited UK 111Development

April 2012 Norton Gold Fields Australia Gold mining Zijin Mining Group China 220

Feb 2012 Sterlite Industries (India) India Non-ferrous metals and mining Sesa Goa India 14,829

Jan 2012 Minefinders Corp Canada Mining of precious and Pan American Silver Corp. Canada 1,431base metal properties

Dec 2011 Quadra FNX Mining Ltd Canada Copper mining services KGHM Polska Miedz Poland 2,960Spolka Akcyjna

Nov 2011 The De Beers Group Luxembourg Mining and marketing Anglo American PLC UK 5,183of diamonds

Nov 2011 Polymetal OAO Russia Leading Russian gold and Polymetal International Channel 6,214silver producer Islands

Aug 2011 HWE Mining Australia Mining services BHP Billiton Australia 1,193

July 2011 Metorex Limited South Africa Copper and cobalt mining Jinchuan Group China 1,485

July 2011 MacArthur Coal Ltd Australia Mining of metallurgical coal Peabody Energy USA 5,163

July 2011 PetroHawk Energy USA Natural gas producer BHP Billiton Australia 15,708Corporation

April 2011 Walbrzyskie Zaklady Poland Production/sales of coke and Jastrzebska Spolka Weglowa Poland 143Koksownicze Victoria S.A. carbon derivative products Spolka Akcyjna

April 2011 Equinox Minerals Limited Australia Mining and exploration of Barrick Gold Canada 7,296mineral (gold, copper)

Feb 2011 Chespeake Energy USA Natural gas and oil properties BHP Billiton Australia 4,771Corporation in the US


3

M&A is an integralpart of miningstrategiesWhether domestic consolidation orcross-border acquisitions, 2011 cameclose to equalling the record year setin 2006, despite the depressed shareprices of some of the top miningcompanies.

The past six months has seen over1,000 deals take place (see Figure 3).driven by supply side issues, includingdiminishing productive mining assetsand rising costs, funded by large cashreserves of the buyers.

Whilst the proposed mega-merger ofGlencore and Xstrata looks more andmore unlikely, 2012 witnessed an arrayof successful deals both in thedeveloped economies (Minefinders/PanAmerican Silver) and the emergingeconomies (Sterlite Industries/SesaGoa).

Historically the rationale behindacquisitions has differed from region toregion. For example, in China the maindriver has been to secure raw materialswhilst in the West it has been to gainmarket share, achieve economies ofscale and cost efficiencies, and gainintangible assets.

Source: Capital IQ, Mergermarket

Figure 3: Selected mining sector deals


4

Rationale foracquisitions broadens

Companies are now however increasingtheir diversification strategies. Bothprivate and state-owned entities aretargeting vertical businesses thatoperate within a specific sub-sector inan attempt to control most, if not all,of the value chain - from raw materialmining and refining to services all theway up to power distribution.

Mining companies are also restructuringtheir operations to address unproductiveand loss-making mines. Barrick recentlyannounced that it is in discussions withChina National Gold Group to buyAfrican Barrick Gold, which experienceda drop in production last year despitemining 509,000 ounces of gold.

The disparity between company sharevalues and metal prices helped gold to bethe most targeted segment - over a thirdof all transactions in the past 18 months.Activity was principally driven by themajors seeking to solidify their marketshare and wanting to use cash that hasbuilt up in their treasuries. We have alsoseen juniors looking to capture resourcesand Chinese companies addressingdemand/supply differences in China.

The second most targeted segment wascoal. Large players in Russia, India andAustralia all looked to strengthen theirpositions by consolidating. Notable dealsincluded India based Adani’s acquisitionof Linc Energy’s Galilee Basin Coal Assets(Australia) for a total lifetime considerationof US$2.7 billion and Peabody Energy’s(USA) acquisition of MacArthur CoalLimited (Australia) for US$5.2 billion.

Figure 4: Breakdown of deals bycommodity %

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Source: Capital IQ

Spotlight onplatinum -precious metalThe two-speed nature of globalgrowth indicates that in themedium to long-term, demandfor metals such as nickel andplatinum will increasesignificantly.

Companies with a diversecommodity mix or those with aparticular focus in the late cyclematerials should benefit.

Recently however investors have grownincreasingly pessimistic about platinum. Neithermine closures nor other supply risks are doingmuch to generate support for the metal.Inflationary pressure and this market uncertaintyhas led to gold becoming intermittently costlierthan platinum.

Although the scarcity of the two precious metalsis similar, the extraction of platinum tends to becostlier, as deposits are usually more diffuse.Around two thirds of annual output is utilised inindustry such as in car production, while for goldas much as 85% is used for adornment or‘store of value’.

Changes at the majorsAnglo American Platinum, the world’s largestplatinum group metals (PGM) producer andaccounting for circa 40% of the newly minedplatinum globally, has recently had a managementreshuffle after its CEO resigned to pursue otherinterests. Lonmin has had to close its main mine inSouth Africa due to strikes and disorder. AquariusPlatinum has announced the closure of two SouthAfrican mines.

Active M&A marketDespite these difficulties, there are still deals beingdone. Reflecting China’s rapid ascendancy in thecommodity cycle chain, Chinese businesses havebeen looking to secure long term supply byacquiring platinum businesses overseas. JinchuanGroup acquired Wesizwe in June (see Spotlight onSouth Africa), which given the high cost structureof many South African platinum mines as well asthe labour situation seems like a gamble to many.

Acquisitions by the majors have tended to betargeted in the mid-market as they look toacquire resource assets and mining capabilities.Bermuda-headquartered Aquarius Platinumacquired mid-market assets including UK basedRidge Mining (US$133 million) and South Africabased Afarak Platinum (US$109 million). AngloAmerican Platinum recently acquired theBoikgantsho Project and the eastern section ofthe Ga-Phasha Project from Bokoni PlatinumMines in South Africa for a combinedconsideration of US$230 million.

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Platinum Gold

Figure 5:Gold vs Platinum US$/oz

Source: BullionVault

Figure 6: Major mining companies


5

Majors will use cashreserves to acquireproductive assets

Industry dominatedby the majorsDiversified mining groups dominate theindustry (see Figure 6). Recent tradingannouncements by Anglo American andBHP Billiton underline the short termdifficulties the industry is facing,however EBITDA margins are stillhigh (>40%).

Whilst a number of development projectshave been shelved until the globalmacroeconomic environment stabilises,M&A is still on the agenda of most.

“There's a lot of opportunity forM&A out there. The seniorsand the intermediates havewatched higher metal pricescause their treasuries to fill upand that’s going to burn a holein their pocket”Rob McEwen CEO, Goldcorp Inc.

Source: Bloomberg

Company Name Country Market Revenue EBITDA TEV / Revenue EBITDA Primary Primary CommentsHQ Cap ($ bil) ($ bil) EBITDA 3 Yr margin Geographies Commodities

($ bil) CAGR % % (Revenue)

BHP Billiton Australia 184.6 75.5 39.5 5.1x 5.7% 52.4% China, North Iron Ore, The acquisition of Houston oil and gasAmerica, Metallurgical explorer Petrohawk Energy Corp for US$15.8Australia Coal, billion elevated BHP into the top 10

Base Metals natural gas producers globally.

Rio Tinto Australia 100.2 56.8 22.2 5.5x 7.4% 39.1% China, Japan, Iron Ore, Has made diversified acquisitions:North America Aluminium Aluminium (Alcan), Coal (Riversdale),

Copper Copper (Ivanhoe).

Vale S.A. Brazil 87.9 49.4 25.2 4.6x 17.6% 50.9% China, Brazil, Bulk Metals, Recent major mining acquisitions includeNorth America Basic Metals, Simandou and Vale Fertilizantes.

Fertilizers

China Shenhua China 69.8 34.9 13.5 5.6x 25.8% 38.6% China Coal, Diversified Most of its acquisitions have beenEnergy Co Power localised and outside of the mining space.

Suncor Canada 48.7 39.6 12.0 4.5x 17.7% 30.3% Canada Oil Sands, Has been relatively inactive in M&A. AcquiredDiversified Energy Petro-Canada in 2009 for US$19.5 billion.

Xstrata Switzerland 43.5 32.7 9.7 6.3x 15.1% 29.7% Australasia, Copper, Coal - The proposed merger with Glencore isSouth America Thermal, Zinc still in the balance due to disagreements

Lead over terms.

Anglo American United 42.9 29.0 9.1 5.11x 11.3% 31.2% South Africa, Platinum, Iron, Has been making acquisitions across theKingdom Chile, Brazil Manganese, cycle chain. From iron (Kumba, Minas Rio)

Copper to diamonds (De Beers).

Glencore Switzerland 40.2 202.0 4.0 11.7x 22.0% 2.0% Europe, Asia Diversified Its largest deal has been its US$7.6 billionMetals, Minerals acquisition of Viterra. Its US$53 billion

and Energy deal with Xstrata has yet to be completed.

Potash Corp. of Canada 35.6 7.9 4.1 9.0x 7.3% 51.4% North America, Potash, Its last major acquisition was its incrementalSaskatchewan Trinidad Nitrogen, stake increase of Chemical & Mining Co. of

Phosphate Chile in 2006.

Barrick Gold Canada 38.2 14.7 7.9 6.3x 25.6% 53.5% North America, Gold, Copper Has been highly acquisitive. Recent highCorporation Australia value transactions include Equinox

Pacific Minerals and Compañía Minera Casale.

Freeport-McMoRan United 34.9 18.4 7.7 4.78x 12.4% 41.9% United States, Copper, Gold, Has been relatively quiet in M&A sinceCopper & Gold Inc. States Japan, Molybdenum its US$28 billion acquisition of Phelps

Indonesia Dodge Corporation in 2006.

Goldcorp Inc. Canada 32.5 5.3 3.0 10.8x 29.8% 57.6% North America Gold, Silver, Has made nine acquisitions since 2008,Copper including the US$3.3 billion acquisition

of Andean Resources Limited.

Norilsk Nickel Russia 25.2 14.1 7.2 4.0x 0.3% 50.8% Europe, Asia, Diversified, Last major mining acquisition was of LionOreNorth America Energy Mining International (Canada) in 2007.

ArcelorMittal Luxembourg 23.1 91.8 9.5 5.0x 1.6% 10.3% North America Iron Ore, Coal Recently acquired Kalagadi ManganeseBrazil,Germany (South Africa),Baffinland Iron Mines (Canada)

and mining service company ATIC Services(France).

Source: Capital IQ


6

Opportunity foracquirer to arbitrage

gap betweencommodity andequity markets

Valuations moreattractive foracquirorsThe Mergers Alliance Global MiningIndex shows a sharp drop since mid

2011 compared to the broader markets.Although certain commodity prices fell,they remain high in historic termsindicating a widening disconnect.Another dynamic weighing on miningstocks is the sector’s susceptibilityto external economic shocks;shareholders tend to flee miningstocks faster than other equities.

Spotlight onRussia – miningheavyweightWith the largest iron ore reservesin the world and the secondlargest recoverable coal reserves,it is of little surprise that Russiaaccounts for a seventh of totalglobal mineral extraction.

Mineral richIt is the leading producer of iron ore (15% ofglobal supply), and of nickel, platinum, palladiumand rhodium and a major producer of aluminium,lead, zinc and copper amongst others. It is alsoa significant producer of gold and silver andindustrial and gem-quality diamonds.

Private sector thrivingUnlike the oil and gas sector where theRussian State plays a significant role, metalsand mining are predominantly private sectoractivities subject to normal corporategovernance and taxation.

Several private companies operate in the sectorincluding Metalloinvest, which possesses theworld’s largest iron ore deposits and sixth largestgold mining assets and Norilsk Nickel the world’slargest nickel and palladium producer and a majorplayer on the copper, cobalt and platinum markets.

Since the collapse of the former Soviet Union, anumber a major integrated steel companies haveemerged such as Severstal, Evraz, Mechel andMagnitogorsk. Severstal has also expanded beyondRussia buying businesses in the USA and Italy.

M&A across the industryM&A in Russia has been dominated by localplayers, however majors such as BHP Billitonare beginning to explore opportunities. It wasannounced in July that BHP was looking at aJV with Millhouse Group, controlled by Russianbillionaire businessman Roman Abramovich,on the development of the gold and copperrich Baimskaya area in Russia’s ChukotkaAutonomous District.

The gold sector in particular has attractedinvestment with Polyus Gold, Polymetal andPetropavlovsk (a successful example of foreigninvestment by Peter Hambro Mining) playingleading roles. Other overseas investors includeKinross Gold of Canada, which has invested inNorth Eastern Russia and Highland Gold, where

the Fleming family have been significantinvestors with three mines located within theKhabarovsk and Zabaikalsky regions.

Coal attractiveThe Russian coal industry remains highlyfragmented, despite considerable consolidationefforts by SUEK (part of the MDM bank group),Mechel, and Kolmar over the past decade.The industry is gradually upgrading extractionand processing equipment and transportinfrastructure. In many cases, managementstrength is an issue, especially for export-oriented production. We expect attractiveinvestment opportunities in the coal sectorand processing over the next few years.

Figure 7: Mining composite valuation index

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Mergers Alliance Global Mining Index MSCI World Index

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Source: Capital IQ

Over 30% dropin valuations


7

Mid-marketacquisitions and

disposals of non-coreassets to boost M&A

Prospects for M&AThe global macroeconomicenvironment is expected to stabilisebefore improving in 2013. Longer term,demand for commodities will be drivenby emerging market industrialisationand with further interventionalistpolicies expected in the Eurozoneand the US in the form of monetarystimulus, we expect commodityprices to rise. M&A activity willcontinue to be robust for all thefactors outlined above.

Majors to spend their significant cashreserves on acquisitions, having largelyheld back on exploration, recognisingthat it is cheaper to acquire productiveassets.

Acquisitions of mid-market listedbusinesses, which have significantlylower share valuations than 18 monthsago and have limited access to capital.

The gap between juniors and majorsis larger than it has ever been andconsolidation activity is necessaryfor economies of scale.

Increase in divestments of non-corebusinesses (second or third tier assets)by the mining majors as they attemptto address capex and cost inflation atunproductive mines.

Demand across all the resourcesectors, with an especially near termfocus on early cycle commodities.Traditional miners, as well assteelmakers and other industrialverticals will increasingly seek outacquisitions in light of continuedchallenges with supply.

China to continue to acquire mid andlate-cycle operations worldwide,especially copper, gold and platinumin order to secure supply.

Spotlight on SouthAfrica – miningat a cross roads

Difficult back dropOn16 August 2012, South African police killed34 striking workers at Lonmin Plc’s Marikanaplatinum-mining complex, the worst death toll inpolice action since the end of apartheid. Thistragedy, sparked by pay disputes, follows newsthat South Africa had its lowest mining output in52 years.

A number of factors contributed to this outputdrop including labour cost pressures and energysecurity and shortages. Slowing global demandhas had a significant impact; iron ore and coal toChina and India have slowed markedly andplatinum demand has dropped as a result of theeconomic woes in Europe and the USA. Whilstmining contribution to South African GDP is nowless than 10% (peaking in the 1980’s at 25%)

mining exports still contribute to 61%of South Africa’s total exports and the countryremains in the top five mining and mineralproducers worldwide.

Regulatory uncertaintyPolitical pressure to allow broader participationamongst previously disadvantaged South Africanscontinues to dominate the debate. However thesingle biggest issue remains the African NationalCongress’ (ANC) discussions on nationalisation,which means a lot of investors are still unsurewhether its current position (against) will besustainable.

Commodity security driving investmentSouth Africa still remains an important mininginvestment destination especially for Chinesebuyers. One of the most high-profile deals in the

past 12 months was the acquisition ofJohannesburg based Metorex for US$1.2 billionby China’s Jinchuan Group, after outbiddingBrazilian mining giant Vale. Metorex is focusedon copper and cobalt opportunities in both SAand Zambia.

In June 2012, Jinchuan also acquired 45% ofplatinum specialist Wesizwe for US$227 millionalong with China Africa Development Fund.Together they have pledged to invest anotherUS$887 million in developing a greenfieldplatinum mine in the Northwest.

M&A activity has been largely focussed off-shoreas the major’s battle the twin threats oflegislation and operating costs (driven largely bywage increases and electricity prices) coupledwith weak global demand.

The South African mining marketremains attractive despitedecreasing output.

Contact Us... Stas MichaelBusiness Manager

Direct Line: +44 (0) 20 7881 2990E: [email protected]

www.mergers-alliance.com

Andre JohnstonResearch Manager

Direct Line: +44 (0) 20 7881 2967E: [email protected]

ContactsSpecialist advice on call…For information on sector trends and M&A in mining

Nick Van Den BrulPartner, Russia

Telephone: +7 495 721 1370Email: [email protected]

Pieter VeldtmanDirector, South Africa


Omkar BiradarVice President, India

Telephone: +91 22 61496666Email: [email protected]

Leonardo AntunesManaging Director, Brazil


Peter GrayManaging Director, United States


Luis Garcia DiazSenior Partner, Mexico


Piotr OlejniczakDirector, Poland


Bart JonkmanManaging Partner, Benelux


Stefan ConstaninManaging Partner, Germany

Telephone: +49 69 97 40 30 0Email: [email protected]

Nuccia CavalieriPartner, Italy

Telephone: +39 02 92 88 04 00Email: [email protected]

Michel DegryckPartner, France


Paul VanstoneDirector, United Kingdom


With a mining sector team, the Mergers Alliance partners are expertlyplaced to offer advice.

In particular, we offer:

Advice on structuring and completing deals in the mining market.

Identifying acquisition opportunities in emerging markets.

Information on sector trends and valuations.

Access to corporate decision-makers and owners.

Join in the mergers and acquisitions discussion

favourablelongterm undervaluedminingsectorcreating ...€¦ · july 2011 macarthur coal ltd...

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