Mining mergers, acquisitions to slow down

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 per cent and 19 per cent month over month in July and a further 25 per cent and seven per cent respectively in August, according to PwC's new Mining Deals report released recently. On aggregate, deal values and volumes have declined by 49 per cent and 25 per cent over the last two months.

In the first half of 2011, there were 1,379 deals announced worth US$71 billion, making it the busiest half year of M&A in the mining sector's history. On an annualized basis, deal volumes and aggregate values were 24 per cent and two per cent higher than 2010, and 12 per cent and three per cent higher than 2009. Average deal values during the first six months of this year were $104 million — 40 per cent 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.

"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 continues to drive long-term fundamentals in the mining M&A market," says John Nyholt, National Leader of Transaction Services, PwC.

PwC doesn't believe this is the end of an era of unprecedented global mining M&A. Chinese demand supported by other emerging nations, is the most critical factor in formulating the commodity market and, therefore, mining M&A expectations.

"While Western world financial commentators operate on three-month forecasts, the Chinese are operating on longer term plans, making this blip largely irrelevant in the grand scheme of things," said Nyholt.

Despite record overall activity during the first half of this year, the usual deal-makers from Canada, Australia and the UK were quiet. PwC did observe, however, a flurry of activity led by US buyers, especially in the coal sector. US entities overtook Canadian entities as the most acquisitive buyers with 31 per cent market share by value in announced acquisitions. With 1 per cent market share by value, Canada was bumped to second place, while typically acquisitive Australia stood at only four per cent.