By Jackie Steinitz
18 Mar 2008 at 03:42 PM GMT-04:00

LONDON (ResourceInvestor.com) -- The report "Mining Deals 2007," published by Price Waterhouse Coopers today, anticipates that even though 2007 was already a record year for deals, the landscape of the mining industry is poised for further dramatic changes with:

• Ongoing strength in the mining M&A market and consolidation among all sizes of company;
• Increasing vertical integration in the industry with upstream moves by power and metal companies;
• Chinese, Russian and Indian companies playing an ever-increasing role;
• The very biggest companies achieving "super-consolidated global scale."

M&A activity is being driven by optimism about long-term growth and profitability. Sustained demand in Asia is expected to outstrip any fluctuations in Western demand.

With skills shortages, exploration costs currently at all-time highs and permitting taking longer than ever companies are seeking to fill their pipeline with development projects, to achieve scale and to diversify their portfolios in commodities and geography through M&A. They are able to do so because of their huge buying power as a result of high commodity prices and buoyant market capitalisations. (Rio has been reported as saying last year that it was generating $1 billion cash each month.)

2007 a Record Year for Deals

Last year was a record year for deals according to the report with a total of 1,732 deals concluded in the sector globally worth $159 billion. There were $25+ billion deals, and a new deal record was set when Rio Tinto [LSE:RIO; ASX:RIO; NYSE:RTP] acquired Alcan for $43 billion.

There was no evidence of any slowdown in activity as a result of the credit crunch; in fact in the fourth quarter of 2007, 510 deals were announced, more than double the number in 2006 Q4.

Source: PwC reports: Mining Deals 2007, Oil &Gas Deals 2007, Power Deals 2007

Analysis of trends by region shows:

• Even though the value of deals in North America fell after the mega-mergers of 2006 it still remains the primary focus for deal-making accounting for 49% of the business. Canadian companies proved particularly attractive, which PwC attribute to the politically stable environment.

• However Asia Pacific was the main motor for growth in 2007 where the value of M&A deals increased by $24 billion fuelled by intense competition for Australian resources.

• Deals by Chinese and Russian companies have increased six-fold in the last two years to $33 billion accounting for 21% of deal activity worldwide. While much of this activity is domestic (the second largest deal worldwide in 2007 for example was UC Rusal's $13 billion investment of a 25% stake in Norilsk Nickel [OTCPK:NILSY]), there was a step change in the value of international purchases including Norilsk's $5.4 billion cash purchase of LionOre, a $796 million investment in Anglo American [LSE:AAL; Nasdaq:AAUK] by Larry Yung, one of China's richest men and Chinalco's [NYSE:ACH] $789 million purchase of the Canadian company Peru Copper.

Source: PwC Mining Deals 2007 (all figures rounded)

2008 M&A Set to Continue

PwC anticipate that 2008 will see a further records being set in the value of deals as super-consolidation takes place in the market. The tone has already been set by BHP's [LSE:BLT; ASX:BHP; NYSE:BHP] takeover offer of $150+ billion for Rio, rumours of a potential $90 billion bid by Vale [NYSE:RIO] for Xstrata [LSE:XTA], and by Chinalco and Alcoa's [NYSE:AA] acquisition of a $14 billion (12%) stake in Rio.

The report concludes:

• Economic slowdown and financial market uncertainty will deliver a bumpier deal-making ride.

• Nonetheless the fundamentals for M&A in the mining sector remain strong and the current M&A activity is a huge signal of market confidence in the sector.

• The strength of the market will be driven by the established majors, Chinese and Russian companies, state-owned enterprises and companies from outside the immediate mining sector.

• The super-consolidation deals will spawn a round further deal activity as companies reorganise their portfolios, divest non-core assets and deal with competition-related issues.

• Consolidation still has a long way to run.

• There is considerable scope for deal-making in fragmented sectors such as copper, lead and zinc, and gold in China.

• The struggle that exploration companies are currently experiencing to gain funding might open the door to friendly deals with big mining companies or end users wishing to secure inputs.

• Recent stock market falls have made some targets much cheaper which may lead to a spate of hostile offers.

PwC have not explicitly measured the effect of M&A activity on share prices. But reading between the lines the combination of long-term optimism, intense competition for resources and the impact of high commodity prices on the cash balances of producing companies have to augur well for the share price of any company with resources in or close to production, particularly those in politically stable areas.

http://www.resourceinvestor.com/pebb...