- Cross-border M&A in the mining sector held steady for the first half of 2016, with US$8.1bn from 38 deals
- China has been the big spender during the past 18 months, with 22 cross-border mining deals worth US$8.7bn
- Asia Pacific attracted US$5.9bn worth of the activity over the past 18 months, followed by North America (US$5.4bn) and Africa (US$4.3bn)
Cross-border M&A in the mining sector remained stable for the first half of 2016 with 38 deals worth US$8.1bn, despite concerns about China’s economic slowdown and weak commodity prices. Volume was down slightly on H1 2015, during which there were 40 deals worth US$7.1bn, but values have shown improvement, and the sector remains on track for another solid year.
“The market may have hit bottom earlier this year,” says Richard Blunt, Partner in Baker McKenzie’s Corporate department in London and a member of the Energy, Mining and Infrastructure industry team. “Not for everybody, but the recent rallies in Glencore and Anglo American stocks suggest a possible turnaround. It’s not going to be quick but we’re seeing optimism among corporates, some of whom have already rebuilt their balance sheets.
“Nevertheless, distressed asset sales and disposal programmes are high on the agenda for the time being,” he adds. “Consolidation may happen, but not necessarily this year.” While Canada has been the most active acquirer over the past 18 months, with 25 deals worth US$1.3bn, China has been the big spender, with 22 deals worth US$8.7bn. Leading the way was China Molybdenum: in April 2016, it agreed to acquire the niobium and phosphates businesses of Anglo American in Brazil, in a deal worth US$1.5bn. This was followed, in May 2016, by the US$2.65bn purchase of a 56% indirect stake in Congo-based copper-cobalt mining company Tenke Fungurume Mining.
Australian and Canadian-based companies were the most common targets for mining transactions, with 18 and 16 deals apiece worth US$1.7bn and US$2.8bn respectively, while US targets attracted 15 deals worth US$2.6bn.
Financial investors enter the fray
The fact that the mining market may have hit bottom (or is perceived to have little further to fall) is attracting investors from across the spectrum – and suggests that now may be an opportune moment to make a move, says Blunt. Increasingly, financial investors expressing interest include private equity, often working in tandem with sovereign wealth funds and hedge funds, searching for new opportunities.
“These investors want to generate value, with a clear route to exit,” says Blunt. “Some are saying H2 2016 is going to be quite busy for mining deals and they’re concerned they’ll face more competition if they wait – at the moment, it’s relatively limited.”
In the past, most financial investors preferred to avoid commodity risk, but the landscape is changing: “Specialist mining funds have appeared in Canada and Australia, and we’ve seen increased interest from the UK and other jurisdictions. In Australia, EMR Capital was one of the newest funds to deploy capital in the past 12 months and it made a number of acquisitions, mainly in copper. Funds are exploring value opportunities,” says John Mollard, Global Head of Mining at Baker McKenzie in Melbourne.
Technology drives new deals
Another driver for improved optimism is the uptick in deals around minerals essential to consumer-driven technology, like lithium.
“Some major players are going to put additional development funding into their lithium deposits,” says Mollard. “For example, as part of a 2015 deal with Australia’s Reed Industrial Minerals, Jiangxi Ganfeng Lithium signed a memorandum of understanding to buy 100% of the 6% Li20 from the spodumene [a lithium source] produced from its Mount Marion lithium project.”
Other minerals associated with new technology for batteries and electricity storage – such as graphite – have been attracting mining M&A activity for some time and this trend looks set to continue.
“We are seeing a fair bit of interest in mineral sands, which include specialist minerals used for high tech applications including the aerospace industry,” says Mollard. “There is interest and ongoing exploration around these, especially in Africa.”
Asia Pacific digs deep
While China’s slowdown may have affected cross-border mining M&A, it remains a major player, says Mollard: “Its interest in mining has revived over the past six months and not just where it has invested before – now it includes these high-tech minerals and base metals.”
With China driving activity, Asia Pacific generally is a key engine of the cross-border M&A market. Over the past 18 months, a total of 55 cross-border mining deals worth US$14.5bn were carried out by Asia Pacific-based bidders. This represents almost 70% of the value of deals in the sector. Much of the activity has been intra-regional (30 deals worth US$5.7bn), as well as sizable targeting assets in Africa, North America and Brazil.
“We’re not surprised that Asia Pacific is still a major engine of growth,” adds Blunt. “China’s growth rate alone dwarfs more or less anywhere else in the world.”
Mollard continues, “Japan still looks like an interested player and Thailand has been active in certain sectors, especially energy. It’s a huge region, and with high demand for raw materials.”
Watch the CEO
According to Blunt, one of the signs as to where the market is heading is who’s running the businesses: “When you’re around the peak, it tends to be geologists,” he says. “At the bottom of a downcycle, people with financial backgrounds tend to be brought in.”