SA Mines and Energy Journal : June-July 2011
JUNE/JULY 2011 SA MINES & ENERGY JOURNAL 16 BUSINESS Mid sector consolidation and offshore acquisitions will be the hallmark of deal activity in the remainder of the year in the Australian mining and metals sector. Our annual global mining and metals sector transaction report, Ungeared for growth, shows that from 2009 to 2010 the number of mining and metals deals in Australia increased 10% to 293 (from 267) while the value of deals soared 121% to US$23.5 billion (from US$10.6 billion). Globally, the number of deals in 2010 was up only 7% on 2009, however the total deal value rocketed up 89% to US$113.7 billion. For the remainder of this year we expect the pickup in merger and acquisition activity in the sector to continue, both locally and globally. There will be more deals, more diverse buyer competition and a continued appetite for projects in frontier markets in South America and Central Asia, and increasingly in Africa. The same factors that drove the uptick in deals in 2010 are continuing to fuel the market in 2011 -- resource security, higher commodity prices, improved cash flow and availability of capital, ongoing industry rationalization and the desire for greater vertical integration. In Australia, we are seeing continued interest from emerging markets, more mid- tier consolidation and a big focus on outbound activity. Given the 2010 resurgence in M&A activity in the sector occurred with restricted access to debt funding and some early indications that bank lending may recover through the course of this year, this will only further accelerate the level of deals being done. Competition from emerging markets to secure raw materials continues to be the key driver of mining and metals deals. Acquisitions from developing economies accounted for 43% of total global deal value in 2010 and over half of the top 20 acquirers for the year were emerging countries. Resource security is driving the key acquirers -- China and India, and to a lesser extent Japan and Korea. India, in particular, shot up the rank of acquiring countries globally from 14th place in 2009 to 7th place in 2010, accounting for 5% of global deal value. India's thirst for resources to fuel its rapid economic expansion is as urgent as China's and in 2010 the value of outbound investment from India surpassed that of China for the first time -- US$4.6 billion compared to US$4.5 billion respectively. Indian investment into Australia in 2010 was the largest by Indian companies to date, and we expect this will lay the foundation for more to come as India scours the world to feed its rapid economic and urbanisation growth plans. Backed by restored confidence, access to capital and investor appetite, 2010 saw record levels of financing, the revival of IPOs and the return of share buybacks and dividends for the sector globally. Globally, the mining and metals sector had the highest market share of IPO and equity- related issues by volume of all industries. Total proceeds (including refinancing) raised by the sector in 2010 reached a record US$329.5 billion -- 54% up on 2009 levels. For Australia, total capital raised by the sector in 2010 was US$72.6 billion, up 213% from US$23.2 billion, with the increase largely due to BHP Billiton's US$45 billion loan for the proposed and subsequently withdrawn offer for Potash Corp. Australia had the highest number of IPOs globally, with 74 and fifth in value at US$1.1 billion. Large-scale bank lending is likely to remain open only to the big diversified miners for most of 2011. Regardless, deals will be about more than cash. Increasingly, deals are about what else buyers can bring to the table in technical know- how and commitment to infrastructure funding and development or off take. The availability and funding of infrastructure remains a fundamental issue in the bankability and development of many resources projects in Australia. Mining companies are turning to innovative models to fund these investments, including user funding and common user facilities. Budget announcements to enhance the tax outcomes for certain priority infrastructure projects are welcome, although at this stage there is little detail. The proposed rules seek to encourage private investment in public infrastructure deemed to be of 'national significance'. Designated projects will receive favourable tax treatment for start- up losses. Infrastructure Australia will also have an expanded role, including in selecting projects to be funded from the Regional Infrastructure Fund. It cannot be disputed that many infrastructure projects of critical importance to the resources sector will also be of national significance. The industry will need to work with Infrastructure Australia to ensure that projects are given appropriate priority in order to attract the favourable tax regime. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation. Mining M&A resurgence continues to accelerate in 2011 BY SEAN VAN DER LINDEN, PARTNER, ERNST & YOUNG AUSTRALIA, ADELAIDE OFFICE MINING LEADER The proposed rules seek to encourage private investment in public infrastructure deemed to be of 'national significance'