China’s role in global mining M&A overstated – Canadian buyers top world

China ramps up deal activity, but Canada outpaced the nation in 2010, 36% to 6%: PwC report

Dispelling the myth that China is amassing de facto control of the world’s mining resources via mergers and acquisitions (M&A), data for the decade ended December 2010 shows China remains a small player in global mining M&A. In 2010, only 6% of global mining deals involved Chinese acquirers, compared to acquirers from Canada (36%), the United States (16%) and Australia (16%), according to PwC’s recent Mining Deals report.

Canada has always been a top destination for mining deals, but in 2010, Canada also topped buy-side activity – both within Canada and abroad.

“The reality is China has been a very active investor in global mining projects in recent years, but its current market share pales in comparison to Canada and other developed countries,” says Hein Boegman, Africa Mining Leader, PwC. “Chinese-led M&A this decade has been impressive, but consider that Rio Tinto and Xstrata alone have completed more acquisitions during the first ten years of this millennium than all Chinese buyers collectively.”

The PwC report tracked 713 deals in 2010 that involved a Canadian buyer compared to 161 involving a Chinese buyer. Year-end results bring the decade ended 2010 tally to 400 Chinese deals worth close to US$48 billion, which is considerable given Chinese buyers were negligible players in mining M&A only ten years ago.

“In the West, Chinese entities have largely been opportunistic partners, seeking to secure supply by being long-term creditors,” says Boegman. “Few Chinese buyers have successfully secured controlling stakes in western-owned mining companies. In fact, 61% of projects acquired by Chinese entities have been within China, with another 16% of Chinese activity in adjoining Asian geographies or other emerging markets.”

PwC expects the focus of Chinese corporate activity to change from 2011. “China is expected to take a more aggressive approach to M&A in 2011, paving the way for the world’s first Chinese-owned diversified mining powerhouse,” says Boegman.

Undoubtedly, 2010 will 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? “Africa is not alone in the heated debate of nationalisation and ownership of resource assets,” says Boegman. “The BHP Billiton/Potash deal and Australia’s Mineral Resource Rent Tax were largely behind these conversations.”

The proposed and abandoned Australian Resource Super Profit Tax announced earlier in 2010 prompted Mark Cuitifani, CEO Anglogold Ashanti, to say “Sovereign risk in Australia is higher than South Africa… Australians are horrified. It potentially damages the industry.”

Africa’s Experience

Globally, entities with a primary interest in gold were the most sought after targets in 2010. The majority of gold mine acquirers exhibited little risk aversion, securing assets in such frontier regions as Mongolia, Sudan and the Democratic Republic of Congo, or in new and untested geographies, such as the Canadian high Arctic.

Africa also saw some healthy interest in its copper resources. In 2010, the majority of global copper activity involved the acquisition of exploration or development stage projects, with active buying in the traditional copper geographies of Canada, Australia, South Africa, Chile and Peru. However, with few good projects in play and supply extremely tight, many buyers sought out projects in new and higher risk regions, such as Zambia, Saudi Arabia, Mongolia and the Philippines.

In the iron ore subsector, there were three large takeovers, worth $5.6 billion - the largest of which was Vale’s $2.5 billion buy from BSG Resources of a collection of iron ore deposits in Guinea, including assets previously confiscated by the West African nation.

The most notable strategic partnership of 2010 was Rio Tinto and Chalco’s (a Chinalco subsidiary) joint venture to develop and operate the Simandou Iron Ore project, which is located in the south eastern part of Guinea in West Africa, and is currently undergoing the final stages of exploration and feasibility studies. When completed, this world-class mining operation is expected to be one of the largest integrated iron ore mine and infrastructure projects ever developed in Africa.

Coal acquirers extended their African reach, and the largest announced coal deal in 2010 was Rio Tinto’s acquisition of the Australian-headquartered Riversdale Mining for $3.8 billion. Riversdale’s most attractive assets are its hard coking-coal projects in Mozambique which, according to analysts, will not come into production until 2013, but have the potential to supply 5-10% of the global market for the key steel-making material.

2010 and 2011 by the numbers

In 2010, PwC tracked 2,693 global mining deals worth US$113 billion, bringing the decade total to more than 11,000 transactions and a value close to US$785 billion. No other sector has seen comparable volumes or growth rates.
The sector saw an impressive recovery over 2009 with announced deal volumes gaining 28% and value climbing 77% higher than the previous year.
Announced deal volumes shattered their previous record by posting a 21% gain over the peak of 2007. Yet, values remained 26% lower than the 2006 peak due to an absence of mega-deals (transactions over US$10 billion). This relative lack of mega-deals is due to an absence of large targets in play.
A record US$27 billion in deals has already been announced in the first month and a half of 2011. The majority (81%) involved companies with interests in gold, iron ore, coal, copper and fertilizers.
Canadian and Australian governments both took action to protect their national resources. Although, ironically, outbound deals from both countries into foreign nations outpaced inbound deals. Canadian-owned entities completed 236 acquisitions of foreign targets worth US$8 billion and Australian-owned entities completed 109 acquisitions of foreign targets worth US$9.7 billion.

Outlook for 2011

The PwC report predicts the pace of deal activity and values to increase in 2011, and anticipated upward pressure on deal values, in turn, may prompt more seniors to invest in organic growth. However, this bullish outlook is premised on the fast pace of the industrialization of the emerging world and that China, among other emerging world nations, will consume massive amounts of resources in what is a historical third industrial revolution.

PwC also expects more takeover activity of junior rare earth projects (as developed nations seek to secure supply amidst concerns of Chinese market concentration), uranium projects (as Asia and other regions set out on nuclear build-outs), and complementary extractive industries like shale (as energy security becomes a larger global concern).

PwC also forecasts an increase in Indian-led deals motivated by a desire to secure iron ore and coal supplies. Transactions are likely to be structured as private placements with offtake or royalty agreements (similar to the Chinese-led deals of 2005-2007).

One of the biggest challenges miners will face in 2011 is overcoming closing hurdles amidst growing criticism from governments, shareholders and NGOs. “The Government of Canada’s rejection of BHP Billiton’s takeover bid of Potash Corp. illustrates how stakeholders can impede deals from closing,” adds Boegman. “In 2011, we believe it will be more important than ever that mining companies proactively work with their stakeholders to avoid similar deal disruptions.”

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, many of which are in Africa. Boegman highlights that African mining M&A faces typical developing market risks not found in sophisticated economies. “Security of operations is always a risk – for example, in Niger, several uranium rich regions are the base homes of nomadic communities, and moderate levels of insurgency have targeted mining infrastructure and staff; and gold miners in north Tanzania have faced uprisings from local villagers. Acquirers interested in Africa also face the challenges of social and environmental stresses, and corruption and lack of transparency. Resource nationalism is an ongoing threat, particularly in times of rising commodity prices, for example in the Democratic Congo of the Republic where government reviewed all post-civil war contracts with foreign miners. Government instability is yet another challenge in Africa, seen last year in Guinea with a change in leadership marked by tension and violence, with mining sector reform now at a very uncertain stage. We are also seeing severe unrest erupting across North Africa. Political unrest and macro instability are both clear and present dangers to mining M&A today.
Understanding and managing political risk will be critical to deal success.”