IOL: Mining firms in emerging markets ripe for takeovers
Mining takeovers, heading for the second-best year on record, are shifting to the emerging markets of Africa and Asia as BHP Billiton, Rio Tinto and Xstrata look to seal cheaper deals in less explored areas.
As prices for most commodities rise, global mining acquisitions have more than doubled in value this year to $132 billion (R902.5bn), boosting advisory fees for banks such as Credit Suisse, according to data compiled by Bloomberg. For those deals, buyers paid an average 23 percent premium, more than twice as high as margins in Latin America, Africa and the Middle East.
BHP Billiton and Rio Tinto lead a list of possible buyers as the top eight mining companies are expected to generate an estimated $132bn in earnings next year, according to Sanford C Bernstein.
Coal, copper and gold were favoured, with Africa among the “hotspots”, said Mark Carlile, the head of resources investment banking in Australia at Credit Suisse.
James Holt at BlackRock Investment Management (Australia) said: “Larger-cap miners are cash-rich and looking for new revenue pipelines.”
Acquisitions by mining firms show the shifting trend, with the industry’s capital flows to the Middle East and Africa more than doubling to $7.7bn this year.
Firms such as Nathaniel Rothschild’s Vallar, Xstrata and Aluminium Corporation of China are investing from Indonesia to Mauritania to lock in supply.
Freeport-McMoRan Copper & Gold and Ivanhoe Mines, with projects in the Democratic Republic of Congo and Mongolia, respectively, are potential takeover targets, according to UBS.
“If you aren’t looking further afield you are just constraining yourself,” said Carlile. Some clients “have the capacity to take on more risk in far flung places, others don’t”, he noted.
Rio Tinto and Mozambique coal developer Riversdale Mining had held talks about a A$3.5bn (R24bn) offer, Riversdale said last week.
Xstrata is paying A$514 million for Sphere Resources to gain three iron ore projects in west Africa.
“Almost by definition there are more resources that can be found in less-developed countries than developed countries,” because of less exploration, said billionaire Ken Fisher at Fisher Investments in California.
Xstrata is paying 15 Australian cents a ton for Sphere’s iron ore, based on the takeover price and stated ore resources.
That compares with A$2.55 a ton BHP Billiton paid in the A$204m purchase of Australian explorer United Minerals in October last year.
Equinox Minerals, based in Perth and with mines in Zambia, paid two times earnings before interest, tax, depreciation and amortisation when it offered A$1.2bn last month for Citadel Resource Group, which is developing Saudi Arabia’s biggest copper deposit.
That compares with the 22 times Quadra Mining paid this year for FNX Mining’s copper and nickel mines in Canada.
Producers can pick up assets more cheaply in developing nations based on lower reserve and resource cost multiples, according to Greg Fournier, the head of Asia Pacific metals and mining investment banking at Merrill Lynch.
Morgan Stanley, Credit Suisse and Merrill Lynch are the top three banks in global mining deals this year, advising on 42 transactions worth $81bn, according to data compiled by Bloomberg.
Morgan Stanley led with 22 percent of global deals, followed by Credit Suisse with 20 percent, although it ranked first in deals in emerging Asia Pacific, Latin America and the Caribbean. Merrill Lynch, a Bank of America unit, was third in the ranking with 19 percent.
Rio Tinto was “actively reviewing opportunities” for small- to medium-sized acquisitions, chief financial officer Guy Elliot said last month.
BHP Billiton chairman Jac Nasser said last month that the board wanted the company to continue to look for acquisitions.
Mining companies remained aware of the risks of doing business in Africa, said Paul Galloway, an analyst at Sanford C Bernstein.
Rio Tinto has been involved in a dispute with Guinea since 2008, when the government ordered the company to hand over part of the Simandou iron ore deposit.
First Quantum Minerals is trying to recover mining rights in the Democratic Republic of Congo after the government withdrew its permit.
“If commodity prices are low and the values of these assets are low there is not too much of an incentive to go off to deepest, darkest Africa,” said Gavin Wendt, a senior resources analyst at Mine Life in Sydney. “You need a higher return on your investment to offset the potential risks in investing in a place like Africa.”
Mergers and acquisitions were a faster, cheaper route to production, Standard Chartered said in August.
The cost of building a copper mine had more than doubled in the past five years, said the company.
“Is it cheaper to put in new stuff today or buy stuff? Where is there less risk?” asked Fisher. “My view is there is less risk in buying.” – Bloomberg
