1h2012 m&a capital raising in mining and metals
TRANSCRIPT
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1BHP Billiton quarterly briefng
Mergers, acquisitions andcapital raising in the mining
and metals sector 1H 2012
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2/82 Mergers, acquisitions and capital raising in the mining and metals sector 1H 2012
Escalating capital costs and softening prices
are forcing mining and metals companies to
rethink investment decisions. This may
herald a shift in focus from build to buy.
However, resource nationalism and macro-
economic issues are making decisions
difcult. This is reected by the steady
decline in deal volume since 2010.
Synergistic and one chance deals continue
to be undertaken, while more speculative
deals are being deferred. The majors are able
to access capital, but remain focused on
maintaining investment grade credit ratings,
driving efciency and reducing nancing
costs. This suggests that there is capacity inthe market to support activity that best
demonstrates attractive returns including
M&A and return of capital to shareholders.
Equity is tightening amid widespread
volatility and risk aversion, impeding the
timing and pricing of IPOs. Early stage
juniors face particular challenges, with
widespread implications for exploration
activity. Majors themselves are becoming an
increasingly important source of capital, as
they look to invest in future growth through
minority holdings and joint venture positions.
Mergers, acquisitions and capital raising in
the mining and metals sector 1H 2012
Note: The data is primarily sourced from ThomsonONE. $ refers to US dollars.
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M&A activityGlobal economic uncertainty and market volatility have subdued
deal value and volume in 1H 2012, but strong balance sheets
among producing companies, favorable long-term fundamentals
and lower valuations are creating an attractive environment
for M&A.
There were 20 megadeals (>$1b) completed in this half, up from
15 in the same period last year reective of opportunistic and
synergistic M&A. Activity in June suggests a pick up in
momentum, with deals totaling $10b completed (up 88% month
on month), and an increase in 1H 2012 volumes on 2H 2011
(although volumes are down year on year).
Higher cross border deal share is being seen, despite a
consolidation drive in commodities such as coal and steel.
Developed market assets were increasingly targeted by BRIC1 and
emerging market players seeking to secure resources.
The Asia-Pacic region was both the preferred destination and the
most active acquirer, with China dominating deal activity. Chinese
mining companies acquired domestic and cross border targets inequal measure, completing deals worth a combined $17b.
Australia closely followed, largely driven by domestic consolidation
among coal companies. North American deal activity more than
halved in comparison with 1H 2011, primarily due to reduced
domestic consolidation activity within the region. This may change
in light of the current shake up of the US coal market.
Major European players continued to be acquisitive, seeking to
achieve growth through outbound M&A. The largest of these deals
was KGHM Polska Miedz acquisition of Canadas Quadra FNX
Mining for $3.3b.
In Africa, the Democratic Republic of Congo and Sierra Leone
were the most-targeted, for copper and iron ore assets, despitethe higher risks associated with these nations. This highlights the
strategic importance of mineral supply.
2010 2011Y-o-Y
change
Volume 1,047 1,008 -4% 580 470 -19%
113,706 162,439 43% 89,746 55,679 -38%
101 161 59% 155 118 -24%
64% 62% -2% 60% 63% 3%
Value($m)
Averagevalue($m)
Crossborder(% share)
Y-o-Ychange
1H2011
1H
2012
Value and volume of deals by size
3Mergers, acquisitions and capital raising in the mining and metals sector 1H 2012
1 Brazil, Russia, India and China
Asia Pacific 19.1
10.4North America
Africa 9.0
Latin America 8.1
Europe 5.9
CIS 3.2
Value of deals by target region ($b)
Asia Pacific 25.2
12.1North America
Europe 9.3
Latin America 5.0
CIS 3.5
Africa 0.6
Value of deals by acquiring region ($b)
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Outbound (bubble size = deal value)Domestic (bubble size = deal value)
0.8 Australia
Japan
Canada
China
Russia
US
Colombia
Chile
South Africa
Mexico
Democratic
Republic of Congo
Sierra Leone
Greece
Namibia
Kazakstan
Mongolia
1.3
1.3
8.5
8.7
1.00.2
2.0
1.5
2.3
2.3
1.9
0.4
0.5
0.2
0.2
0.2
Germany
BelgiumSwitzerland
0.5
3.3
1.6
1.5
0.4
1.1
0.9
0.3
0.6
1.0
1.5
1.8
UK
1.1 0.7
Argentina
3.0
1.4
0.7
1.3 6.1
1.4
3.6
Commodities coal remains top target
Coal remains the most targeted commodity in 1H 2012 in value
terms at $12.4b, despite a year-on-year decline in activity as
lower shale gas prices weakened coal demand. Coal acquisitions
were driven by:
Power utilities and trading companies buying assets to secure
supply
Consolidation in order to achieve synergies and economies of
scale, particularly in Australia due to the inationary cost
environment
Large players looking to boost production capacityCopper was the second most sought-after commodity in 1H 2012,
with $9.2b of deals completed. Activity was driven by strong
long-term demand fundamentals and competition for scarce,
quality assets. Steel deals took the third largest share of deal
value, reecting consolidation among Chinas fragmented steel
sector in an effort to remove excess capacity, reduce costs and
improve margins.
Gold deals took the highest share of deal volume at 160 in
1H 2012. However, there have been fewer sizeable deals
compared with the same period in 2011, resulting in a relatively
low average deal value of $40m (down from $62m during
1H 2011).
Expectations of a demand rebound in uranium is triggering
acquisitions to secure future supply in the current depressed
pricing environment deal value and volume has increased
year on year.
M&A outlook
We expect to see continued uncertainty and volatility in the
market throughout 2012. Those companies with a bullish outlook
on China, and that can work with volatility, will be the dealmakers
this year.
The following factors are likely to drive future deal ow:
Lower valuations, which may drive opportunistic deal activity
A prevailing focus on M&A in familiar territory during volatile
times; this may take the form of domestic consolidation or
companies seeking to build on their minority holdings and JV
positions. Synergistic, one chance deals if valuation metrics permit
Increasing costs of organic projects driving a greater focus on
M&A by the producers
Greater scrutiny on investment returns will force management to
adopt more sophisticated bid tactics and focus on synergies and
unique competitive advantages.
We expect to see more divestment activity, and an increased focus
on portfolio management, in the face of rising costs. Nearly 70%
of mining and metals respondents in Ernst & Youngs Capital
Confdence Barometer (April 2012) conrmed they are planning
divestments in the next 12 months to focus on core assets.
M&A outflows for key nationsDeal values in $b
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Proceeds$b
0
50
350
400
2007 2008 2009 2010 2011 1H 2011 1H 2012
300
250
200
150
100
LoansBondsConvertiblesFollow-onsIPOs
Capital raising by asset class proceeds raised (20071H 2012)
Proceeds$b
0
5
25
Jan Feb Mar Apr May Jun
20
15
10
Equity Bonds Loans
Capital raising by month proceeds raised (2012)
Capital raisingtrendsChallenging markets contributed to a
decrease in capital raising activity in
1H 2012, compared with the same period
a year ago. Total proceeds fell 35% to
$123b, with a 16% decline in volume of
issues. There has been almost a 50%
reduction in the number of companies
raising capital, and a marked decline in
equity raising due to market volatility.
However, corporate bond activity continues
to break records, following on from a
strong 2011.
5Mergers, acquisitions and capital raising in the mining and metals sector 1H 2012
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IPOs a dramatic drop-off
Market volatility has had a profound impact
on 2012 IPOs across all sectors. The
mining and metals sector has been
particularly impacted due to a decline in
investors appetite for risk, and lower
valuations, which have resulted in issues
being too dilutive for foundation
shareholders.
IPO volume fell 37% to 47 IPOs in
1H 2012. Proceeds decreased by a
signicant 80% (excluding Glencore) to$0.9b, from $4.3b in 1H 2011.
All major mining capital markets were
impacted, with lower volumes, reduced
prices and deferrals experienced on the
Hong Kong, London, Australian and
Toronto exchanges.
The largest share of proceeds were raised
in Hong Kong ($644m), with the TSX-
Venture exchange attracting the highest
share of junior IPOs at 22 still a 53%
year-on-year decline. The largest cross-
border IPO was that of Chinas Rare EarthsGlobal, which closed the half with a market
value of $322m, listing on AIM to capitalize
on demand outside of China.
IPOs remain on the corporate agenda but
in such a volatile market, only the ASX and
TSX-V are seeing real volumes. A relatively
small number of explorers are raising
minimal funds through IPO in order to gain
a market presence for future raisings.
Short term nancing solutions (including
private placements and debt facilities) are
being sought as an interim solution forthose in need of immediate capital.
Follow-on equity in free-fall
Proceeds raised from follow-on issues of
equity are also down signicantly year on
year, following a particularly volatile
2Q 2012. Volume declined by 18%, while
proceeds dropped 69% to $10b, from
$32b in 1H 2011. This was the result of
fewer large issuers and a reduction in
funding to the juniors.
Mid-tiers and advanced juniors attracted
equity investment to fund the development
of quality projects and acquisitions.However, early stage explorers are faced
with fewer options and challenging market
conditions, with average proceeds by this
group falling to $3m in 2Q 2012.
Convertible bonds project-based funding
Convertible bonds showed a year-on-year
increase in volume and proceeds in
1H 2012, largely driven by small-scale
project-based funding for advanced
juniors/mid-tiers unable to access straight
bonds. Over $2.1b of proceeds were
raised, compared with $2.0b in the same
period a year ago. Convertibles can be an
attractive investment option in periods of
volatility, offering investors some downside
protection.
Australian issuers took the highest share of
proceeds, offering opportunities for
investors to participate in the growth
potential of Australias mining industry. We
have also witnessed a number of strategic
investors taking cornerstone positions in
convertible bonds during the rst half of
the year, including Mount Kellett Capital
Management in Lynas Corps $225m issue,
and China Railway Materials in African
Minerals 8.5% notes due 2017.
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Corporate bonds continueddemand drives record proceeds
The popularity of corporate bonds
continued during 1H 2012, with a 29%
increase in proceeds to $59b from $46b
year on year. Corporate bonds remained an
attractive funding option for the majors
looking to renance, push out maturities
and lock-in favorable long-term yields.
The rst half of 2012 was about windows
of opportunity, reecting uctuating
market condence. There was a slow startand end to the rst six months, with a clear
preference for quality compared with
1H 2011. But mid-tier companies found
pockets of demand in March and May for
high yield issues and we expect that
sustained (albeit volatile) demand for yield
should provide valuable support for
mid-tier producers and advanced juniors in
the second half.
The rst half of 2012 witnessed a greater
share of volume by emerging market
issuers accessing US dollar investors,looking to secure rates ahead of an
expected increase in US treasury yields.
Nearly $9b of investment grade Euro
bonds were raised, despite challenging
market conditions in the Eurozone,
reecting investor demand for quality
investment opportunities.
Record low coupons were again achieved
by investment grade majors. Conversely,
yields remained relatively high for sub-
investment grade mid-tier companies,
driving demand among yield-seeking
investors.
Syndicated loans majorrefnancing, but little project
fnancing
Syndicated loan proceeds declined 46% in
1H 2012, to $51b from $95b in 1H 2011.
Large deals have been reserved for A-rated
borrowers with strong banking
relationships for example, Glencores
$12.8b renancing with a 91-strong
syndicate of lenders. However, with over
half of this years loan proceeds used to
renance existing agreements, very little
new money is owing in, particularly for
project nance. During 1H 2012, $2.9b
worth of project nance was closed, the
largest deal being a $1b facility for First
Quantum Minerals Kansanshi copper mine.
A mandated pipeline of $10.8b in 2012 is
still to be nanced.
With Basel III making it increasingly difcult
for Western banks to provide anything
other than short-term loans at competitive
prices, we will continue to see a signicant
shift away from traditional long-term,
project-based bank lending in the sector,
and an increased role for alternative
lenders and funding structures.
Capital raising outlook
We expect the corporate bond market to
remain strong in 2012 for investment
grade issuers, with sustained but volatile
demand for higher-yielding sub-investment
grade issues by mid-tier companies for
project development. With funding options
(both equity and debt) tightening for
juniors, we may see bond investors with
higher risk appetites (such as hedge funds)
willing to fund quality projects in smaller
companies.
The IPO markets are expected to remain
difcult, with companies unlikely to pursue
large issues in the very short term, at such
dilutive levels. Signs of recovery in global
equity market conditions over the second
half of 2012 could lead to an increase in
IPO activity in Q1/Q2 2013.
Markets are volatile and sentiment-driven:
pockets of condence will drive investor
demand, but companies may increasingly
look to strategic investors willing to invest
for the long-term. Funding may come from
Asian lenders, made via co-investments in
overseas projects with local state partners
such as infrastructure developers. Such
investment often comes with additional
ties, however, such as a share of future
offtake. Multiple options need to be
pursued to raise nance at the right price,
in order to create competitive tension and
ensure that reliance is not placed on just
one source of nance.
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