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Mining Sector M&A Activity Gearing Up for a Big Year!

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June 17, 2008 – Comments (4) | RELATED TICKERS: RIO , RTP.DL , FCX

June 12 (Bloomberg) -- Metals are the new green on Wall Street, as mining has displaced financial services to become the biggest source of mergers and acquisitions.

The value of announced mining takeovers more than tripled to $199 billion in the first five months of 2008 from a year ago, even as the global pace of M&A dropped 37 percent, data compiled by Bloomberg show. Financial-services companies, the largest driver of merger fees for the past two years, disclosed $173.5 billion of transactions in the first five months. It's the first time mining mergers have topped the M&A table since Bloomberg began compiling the data in 1998.

``We have moved into the age of commodities,'' said Carl Hughes, a London-based partner at Deloitte & Touche LLP, who oversees the firm's energy and resources practice. ``You clearly have a large number of mining companies just generating cash and profit like there is no tomorrow.''

A $100 billion deal is ``imminently possible,'' said Shaun Treacy, who runs Lehman Brothers Holdings Inc.'s global metals and mining group from London. That would be in addition to BHP Billiton Ltd.'s $147 billion unsolicited bid this year for Rio Tinto Group in the world's largest mining transaction.

``The race is on for valuable, high quality, scarce resources,'' said Treacy, 41. ``Rumors are circulating about various transactions, as there continues to be significant appetite.''

Potential Targets

The increase in takeovers is occurring as companies compete for scarce minerals assets and as rising costs make it cheaper to buy rivals than to develop new mines.

``I wouldn't be surprised to see mega-deals in the next six months, whether it is $20 billion or $50 billion and up,'' said Tim Goldsmith, 45, a partner at PricewaterhouseCooper's mining practice in Melbourne. ``There is a global desire to grab whatever resources are available because they are in short supply. There are good times ahead.''

Freeport-McMoRan Copper & Gold Inc., the world's second- largest copper producer, Alcoa Inc., the third-biggest aluminum producer, and Grupo Mexico SAB's Southern Copper Corp. are possible acquisition targets, bankers said. The companies have a combined market value of about $112 billion. Officials at all three companies declined to comment.

Cia. Vale do Rio Doce, the Brazilian iron-ore producer that scrapped a takeover bid for Xstrata Plc, said June 10 that it may sell as much as $15 billion of shares to pursue takeovers.

BHP Fees

UBS AG and Credit Suisse Group, both based in Zurich, and New-York based Morgan Stanley are the top-ranked M&A advisers in mining and metals this year, according to Bloomberg data. JPMorgan Chase & Co. and UBS have been adding commodities analysts in the emerging markets.

The 13 banks involved in the hostile offer by Melbourne- based BHP for Rio Tinto, including Goldman Sachs Group Inc. and Citigroup Inc., may earn a combined $280 million in advisory fees if the transaction goes ahead, according to data compiled by New York-based analysts at Freeman & Co.

BHP, the world's largest mining company, filed for antitrust approval last month in Europe, the U.S., Australia and South Africa to acquire Rio Tinto, which would create a producer of a third of the world's iron ore and become the biggest provider of copper, aluminum and power-station coal.

The value of BHP's offer for Rio is calculated from the day it sweetened its all-share bid to 3.4 BHP shares for each Rio share on Feb. 6.

Emerging Markets

``It's a frenzy, and I don't see it changing,'' said Paul Knight, 48, the co-global head of UBS's metals and mining business, who is based in London. ``Boards have confidence that this environment is going to stay.''

Much of the M&A business is being generated by Russian, Chinese and Indian companies snapping up assets to provide metals those economies need to fuel construction booms.

Aluminum Corp. of China and the Chinese state-owned Sinosteel Corp. have spent more than $16 billion buying stakes in mining assets worldwide to diversify their sources of raw materials after coal prices tripled and iron ore rose 65 percent this year. India's Vedanta Resources Plc agreed to pay $2.6 billion last month for the assets of bankrupt Asarco LLC, its first North American acquisition.

United Co. Rusal, the world's largest aluminum producer, bought a $13.3 billion stake in OAO GMK Norilsk Nickel in April from an investment company controlled by billionaire Mikhail Prokhorov. Rusal wants to combine with Norilsk, the largest nickel producer, to challenge BHP. Rusal and Norilsk are both based in Moscow.

$55 Billion Loan

``They have been flexing their muscles,'' said Andrew Cornthwaite, head of investment banking and finance at Moscow- based Renaissance Capital, who's now working in Lagos to find assets in new regions. ``Emerging markets are very much the focus.''

Goldman, Citigroup and five other banks agreed to provide a record $55 billion loan for BHP's Rio offer. Brazil's Vale, the world's largest iron ore producer, arranged a $50 billion package for its failed bid for Switzerland's Xstrata through banks including BNP Paribas SA.

``As the financing market continues to open up, the probability of large deals will increase exponentially,'' said Philip Keevil, senior partner in London at Compass Advisers LLP and former head of European mergers at Salomon Smith Barney Inc.

Red Riding Hoods

``The question is which companies are wolves and which are Red Riding Hoods?'' Keevil said. ``Vale will continue to be a wolf, as will BHP. Rio has been both. If it ever escapes from BHP, it will likely be aggressive again. Freeport-McMoRan is digesting Phelps Dodge, but it has the size and scale to do something else.''

Phoenix-based Freeport, operator of Grasberg, the world's second-largest copper mine in Indonesia, and New York-based Alcoa, the world's third-largest aluminum producer, may be acquisition targets in the next year, said Michael Lynch-Bell, London-based head of metals and mining at Ernst & Young LLC. Freeport has a market value of $45.3 billion and Alcoa is at $34.4 billion.

Southern Copper, a unit of Mexico's largest mining company, may be a ``more sensible'' target for an acquirer such as Vale, said John Meyer, head of resources at U.K. investment bank Fairfax I.S. Plc.

``With most hard commodity prices at record highs, companies can afford to borrow to buy, which has been an important factor in many of the deals in 2008,'' said Scott Moeller, finance professor at City University's Cass Business School in London and a former banker at Morgan Stanley and Deutsche Bank. ``Unless commodity prices were surprisingly to plummet, I would expect these deals to continue.''

No Credit Crunch

High commodity prices are making investment in exploration attractive again, Lynch-Bell said.

``The credit crunch has not derailed funding for these projects,'' he said. ``Bankers are telling mining companies, `If you have good assets and good management, the money will be there.'''

Acquisitions are a faster way to grow, said Peter Bacchus, 39, who runs Morgan Stanley's European metals and mining advisory business in London.

``If companies want to grow, they can either find something that might take 10 years to develop or buy something,'' he said.

The Middle East also is becoming a ``broader opportunity'' across most industries amid rising oil prices and increased investment by sovereign wealth funds, said Julian Mylchreest, 39, head of Middle East and African investment banking at New York- based Citigroup.

Citigroup, the biggest U.S. bank by assets, has more than 70 people in investment banking in the Middle East, up from 40 two years ago, Mylchreest said.

``With oil prices above $100, this is in my view not a passing trend, but a fundamental shift in the investment banking global center of gravity away from New York, even from London,'' he said.

To contact the reporters on this story: Ambereen Choudhury in London at achoudhury@bloomberg.net; Brett Foley in London at bfoley8@bloomberg.net

http://www.bloomberg.com/apps/news?pid=20601208&sid=aKojsiETnI9Q&refer=finance

4 Comments – Post Your Own

#1) On June 17, 2008 at 8:39 PM, anchak (99.85) wrote:

This makes perfect sense - they are flush with cash - and are on the hunt.

Any suggestions on potential takeover candidates - with clean balance sheets?

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#2) On June 18, 2008 at 12:43 PM, XMFSinchiruna (27.59) wrote:

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:)

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#3) On June 18, 2008 at 3:38 PM, adventurerneil (< 20) wrote:

What's the effect on a stock when it's taken over? I have little to no experience with M&A...

Also, what is meant by a "hostile takeover"? 

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#4) On June 20, 2008 at 5:00 PM, TheGarcipian (38.11) wrote:

Neil,

A hostile takeover is when the buyer purchases enough of a controlling interest in a company (which is usually, but not always, just above 50%) in order to get the purchased company's board of directors to comply with its wishes. Either that, or the board is thrown out and a new board substituted that's congenial to the new owner's wishes. A non-hostile takeover, commonly just called a "merger", occurs when two companies see a greater good coming out of their joining, being more than the sum of their parts; e.g., broader customer base, combined efficiences in production or sales, etc. 

Hope that helps,

--Gar 

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