e&y - capital & raising in mining metals

7/30/2019 E&Y - Capital & Raising in Mining Metals

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Mergers, acquisitions and capitalraising in mining and metals

2012 trends

2013 outlookWhen opportunity knocks, who answers?


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2 Mergers, acquisitions and capital raising in mining and metals


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About this study The data is primarily sourced from ThomsonONE.com.

Unless otherwise stated, all values are in US dollars.

This Ernst & Young study examines transactions andfinancing in the mining and

metals sector in 2012, and discusses the outlook for 2013.

It provides an in-depth analysis of the major global mining and metalstransactions, capital markets and resulting capitalflows, by considering mergers

and acquisitions (M&A), initial public offerings (IPOs), secondary equity offerings,bonds and loans. It also provides an analytical breakdown by country and

commodity.

Mergers, acquisitions and capital raising in mining and

metals 2012 trends, 2013 outlook

Mergers and acquisitions (M&A)

Only completed deals are included. Deals

identified as incomplete, pending, partlyincomplete, conditional or intended as of31 December 2012 were excluded.

The acquirer country is based on

the ultimate owners geographic

headquarters. The target country isdetermined by where the primary

targeted asset or company is located.

Country-based refers to domestic andinbound deals.

A countrys acquisition refers to

domestic and outbound deals.

Commodity analysis is based on thecompanys primary commodity focus.

The value of M&A activity by commodity

includes deals where the given

commodity is the acquirer and/ortargets primary commodity. Commodity

charts illustrate the value of deals where

the given commodity is the target.

The data does not capture the value of

transactions where this information is

not publicly available.

Mega deals refer to all deals with avalue equal to, or greater than, $1b.

Capital raising

The primary source for this data is

ThomsonONE. Certain details have beensupplemented with information fromcompany and stock exchange websites

and major business press. Only completedtransactions are included.

Only original Initial Public Offerings

(IPOs) thefirst time that a company

issues equity to the public areincluded in the IPO analysis. Proceeds

are allocated to the primary exchange

of listing.

Equity issues are geographically

categorized by the primary exchangewhere the issuers stock trades, exceptwhere stated. Where a company offers

Global Depositary Receipts or American

Depositary Receipts, the issue isallocated to the destination market of

those shares.

Loan data and proceeds include

refinancing and amendments to existingdebt, and are as per Thomson ONE

intelligence. Proceeds are allocated tothe geography of the borrower.

All credit rating references are toStandard & Poors long-term issuer

ratings, unless otherwise stated.

Notes on the data:

Mergers, acquisitions and capital raising in mining and metals


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This report was authored by:

And thank you to the Ernst & Young Global Mining & Metals team for their support.

Mike ElliottGlobal Mining & Metals LeaderErnst & Young, Australia

Tel: +61 2 9248 [email protected]

Lee DownhamGlobal Mining & Metals

Transactions LeaderErnst & Young, UKI


Paul MurphyAsia-Pacific Mining & Metals

Transactions LeaderErnst & Young, Australia


Nicky CrabtreeAssistant Director, Mining & Metals

Transactions Advisory Services, UKI


Kunihiko TaniyamaJ apan Mining & MetalsTransactions LeaderTel: +81 3 4582 [email protected]

Emily ColborneStrategic Analyst, Mining & MetalsErnst & Young, UKI

Tel: +44 121 [email protected]

Sameera SandhuSenior Analyst, Mining & MetalsErnst & Young, India


Robert StallAmericas Mining & Metals

Transactions LeaderTel: +1 404 817 [email protected]



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ContentsThemes Commodityanalysis Spotlight Africa 48Spotlight Latin America 51

Australia 53

Canada 54

China 55

India 57

Indonesia 58

J apan 59

Russia 60

South Korea 61

United Kingdom 62

United States 63

Countryanalysis

Aluminium 37

Coal 38

Copper 39

Gold 40

Iron ore 41

Nickel 42

Potash/Phosphate 43

Silver/Lead/Zinc 44

Steel 45

Uranium 46

06 Executive summary|

12 SpotlightThe rise of anew class of investor|

16 Mergers & acquisitions|

10 Q&A with ChinaInvestment Corporation

|

25 Capital raising|

34 Outlook|

5Mergers, acquisitions and capital raising in mining and metals


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Executive

summaryAs traditional sources of capitaland M&A have contracted, a

new class of investor has grownin importance, both as a sourceof capital and a driver of M&Aactivity during 2012.

Lee DownhamGlobal Mining & Metals Transactions Leader,

Ernst & Young, UKICapital raising by asset class proceeds (20072012)

Proceeds$b

2007 2008 2009 2010 2011 2012

0

50

100

150

200

250

300

350

400

IPOs Follow ons Convertibles Bonds Loans

2012: the emergence of a two-tiercapital environmentDuring 2012, we witnessed a fall in overall capital raising proceeds

for thefirst year since 2009.

Economic uncertainty created volatility and risk aversion

among investors, limiting capital raising options for mid-tier

and junior mining and metals companies, but generating uniqueopportunities for the industrys relative safe havens the

investment grade producers.

2012 saw unprecedented demand from high-grade investment

funds for primary debt issuance. Such demand was the resultof substantial capital inflows from an increasingly risk averse

investor universe, set against a backdrop of volatile markets and

fragile economic newsflow. Investment grade borrowers took fulladvantage of thisflight to quality as they issued long-dated bonds

at pricing levels many banks struggled to match. Investmentgrade issues totaled $73b for the year, comfortably exceeding the

2011 figure of $57b, as the large-cap producers raised capital for

organic growth and to refinance existing debt.

The high yield1 bond market was volatile due to its sensitivity tonews-driven sentiment. This limited capitalflow to the sectors

mid-tier companies, and increased the cost of borrowing, with

average spreads on high yield debt widening by some 200 basispoints (bps) compared with 2011.

1 Sub-investment grade (junk or high yield) debt, considered to have significant speculativecharacteristics, holding a higher risk of default. High yield is defined as an issue with an S&P ratingequal to or less than BB+and a Moodys rating equal to or less than Ba1.


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Traditional M&A

Non-traditional investorsTraditional M&A

Pre GFC:

Primaryinvestmentdrivers

Examples

Post GFC:

Expansion

Consolidation


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Volume and value of deals by size (20032012)

Relative commodity price performance (rebased at 1 J anuary 2012)

An emerging valuation gap hasstunted overall M&A activityBuyer and seller agreement on deal valuation has become

increasingly difficult to bridge in 2012 due to the volatility ofcommodity prices and growing divergence between mining

and metals equities and commodity prices. Sellers have been

unwilling to accept lower valuations based on their depleted shareprices in 2012, looking back at 52-week highs and expecting

healthy premiums.

This divergence is causing longer, more complex deal negotiations,resulting in sluggish M&A at best. Chinese private equityfirm

Cathay Fortunes now lapsed hostile takeover bid for Australian

copper junior, Discovery Metals, is a prime example of thevaluation gap that emerged in 2012. As a result of these factors,

both the value and volume of M&A completed in the mining and

metals sector has decreased; 941 deals completed during 2012,amounting to $104b, representing a year-on-year decrease of 7%

and 36%, respectively.

Challenging trading conditions createdan era of capital optimization forproducing miners

The mining and metals sector is facing some of the most

challenging trading conditions since the GFC. Commodity prices

have softened and operating and capital costs have soared,resulting in squeezed margins.

Additionally, the safe havens (the investment grade producers)

have become victims of their own success. The prior years ofstrong growth, prudent balance sheet management and exposure

to emerging market demand attracted a new breed of investor to

share registers. During 2012, these investors have shown greaterconservatism and are demanding shorter return timeframes for

new investments.

Applying this mindset to investment decisions in a capital-

constrained and challenging trading environment prompted manymining and metals companies to re evaluate their priorities during

the second half of 2012, and a capital strike was declared. Capitalprojects were rationalized and deferral plans were implemented onall but the most important top-tier projects.

Companies also continued to review their portfolios andannounced the divestment of non-core assets. Vale, Rio Tinto

and BHP Billiton all announced divestment plans. M&A activity,

for the most part, was lower down the agenda for the mining andmetals majors. The M&A that did complete primarily took the

form of the consolidation of existing stakes in assets, such as Rio

Tintos acquisition of Richards Bay Minerals and Anglo Americansacquisition of De Beers.

40

60

80

100

120

140

160

J an 11 Apr 11 J ul 11 Oct 11 J an 12 Apr 12 J ul 12 Oct 12

LMEX Index Iron ore Gold Coal

Volume

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

200

400

600

800

1,000

1,200

0

50

100

150

200

250

Value($b)

Volume$1b

Source: Thomson Datastream


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The Capital Agenda

Based around four dimensions, the Capital Agenda helpsmining and metals companies consider their issues andchallenges and understand their options to make moreinformed capital decisions.

1. Preserving capital:reshaping the operational andcapital base

2. Optimizing capital: driving cash and working capital andmanaging the portfolio of assets

3. Raising capital:assessing future capital requirements andassessing funding sources

4. Investing capital: strengthening investment appraisal andtransaction execution

How organizations manage their capital agenda today will

define their competitive position tomorrow.

Ernst & Young works with our clients to help them make better

and more informed decisions about how they strategically

manage capital and transactions in a changing world. Whetheryoure preserving, optimizing, raising or investing capital,

Ernst & Youngs Transaction Advisory Services bring together a

unique combination of skills, insight and experience to delivertailored advice attuned to your needs helping you drive

competitive advantage and increased shareholder returns

through improved decision-making across all aspects of yourcapital agenda.

Outlook a new wave of capitalraising options as companies refocuson growthLong-term demand for the sector will continue to be driven

by China and other BRIC (Brazil, Russia, India and China)

and developing nations. The rapid cut-back of expansion andcapital spending by many organizations is expected to slow

long-term supply and prolong a super-cycle scarcity premium.

Consequently, those with access to capital and a long-term viewwill seek to invest.

The capital strike is expected to continue until commodity

prices recover sufficiently to encourage new investment.For example, we believe that the iron ore price would need to

exceed $130/tonne for a prolonged period of time to unlock the

next wave of expansion projects. Hence, M&A of iron ore juniorsbelow that level represent an option over future supply shortfalls.

This capital strike will also impact the majors as a consequence of

their 2012 asset reviews. A number of high-cost mines are highcost because they have been starved of capital in recent years. Weexpect a good number of these mines to be divested by the majors

to owners with capital available for acquisition and reinvestment.

The 2013 capital raising environment is expected to be shapedby the continued shift from traditional capital markets funding to

non-traditional capital providers.

The announcement in J anuary 2013 of a delay to fullimplementation of, and changes to, Basel III liquidity requirements

is unlikely to herald a significant change in lending behavior in

the year ahead. As a result, we believe there will be a continuedscarcity of longer-term commercial bank lending under Basel III,

with private, strategic lenders, equipment providers and nationaland development banks taking the role of project financiers.

A slow and steady revival in equity markets is anticipated asconfidence returns and a strong pipeline of cross border IPOs

eagerly await the return of the market.

Corporate bonds will remain a popular source offinance duringthe year ahead, and we see the potential for an increasedflow of

funds into the high yield sector, supporting the industrys mid-tier

growth as the investment grade market becomes saturated andinvestors chase greater yields.

Shareholders demands for greater dividends may threaten

growth during 2013, where investors have been increasingly

frustrated by weakening share prices and lower profitability.

Shareholders are calling for companies to rethink capital allocation

decisions, and this will inevitably result in a greater focus oncapital recycling.

As a result, leaner business models and stronger balance sheets

will emerge during the second half of 2013 as companies continueto rationalize portfolios, unlock capital through divestments and

drive cost savings. We anticipate that companies will look to re-focus on growth in late 2013 as the pressure to replace depletingreserves and maintain production mounts but the question

remains as to whether this will take the form of building or buying.

While it is likely to be both, we expect to see a stronger buy-cycle

during 2013, underpinned by lower valuations and in responseto large cost overruns at several greenfield projects. Buying

opportunities will be pursued by those companies that emergefinancially stronger and are able to access capital to drive M&A.

We expect 2012 to represent the peak of the capitalstrike. Stronger balance sheets are expected toemerge during the the second half of 2013, drivinggreater corporate activity.

Nicky CrabtreeAssistant Director, Mining and MetalsTransaction Advisory Services, UKI


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Q&A with ChinaCorporationQ: CIC has invested in a number of

mining and metals companies throughthe acquisition of minority interests.What are the key characteristics ofthe mining and metals sector that are

attractive to CIC?

A: We look at the long-term fundamentalsand investment merits instead offocusing on the near-term prospectsof certain commodities and how tomanage the short-term volatility. Ifyou buy into the growth prospectsof the BRIC countries in particular,China you will invest in the positivelong-term fundamentals of the sector.Chinas rapid growth in urbanization hasincreased the demand for commodities,putting pressure on the supply side

(especially for high quality assets). Thisin turn results in a favorable investmentenvironment.

When evaluating investmentopportunities in the mining and metalssector, we focus on the quality andlocation of the assets, including thegeopolitical environment where theassets are located. Given the increasingconcerns over cost inflation andresource nationalism, we are quitediscerning as to the location of potentialassets and in particular, we scrutinize

the ease of extraction, the grade, therequired infrastructure development, aswell as the stability of the jurisdiction.

In addition, as a minority financialinvestor, we need to partner withan established operator with strongfundamentals. For example, we investedin Teck Resources during 2009 oneof the few integrated mining companieslocated in Canada (a stable jurisdictionand a developed country), which met allof our key criteria.

Q: During the past year, state-ownedenterprises, sovereign wealth fundsandfinancial investors have beenincreasingly active in the mining andmetals sector. There is also a growing

trend in toehold investments oracquisitions of minority interests.How would CIC differentiate itself asthe partner of choice in conductingoverseas investments?

A: CIC is mandated to focus on investmentopportunities out of China. While wepursue significant minority investmentopportunities, we do not take controlor conduct hostile takeovers. Our keydifferentiators from other investors are:

1. Our ability to accelerate the growthplan of our investee companies with

respect to China which could resultin a halo effect on the valuation,be it developing key relationships oridentifying and pursuing synergisticopportunities in China

2. Our ability to co-invest in growthopportunities and bring in othersources offinancing (such as debtfinancing and project financing,if required)

In todays capital-constrainedenvironment and where growth

opportunities in China are of strategicimportance, CIC offers compellingstrategic value to our investeecompanies as a significant minorityinvestor.

Q:The mining & metals sector isconfronted by many challenges today,such as resource nationalism, costinflation, skill shortages, to name a few.As a minority investor, you do not havethe operational control of the businessto actively manage the underlying risks

Q&A with Felix P. Chee,Chief Representative, China

Investment CorporationsRepresentative Officein Toronto.

Ramona Cheng

Americas Markets LeaderChina Business NetworkErnst & Young, Canada

Mr. Felix P. CheeChief Representative,CIC Representative Office in Toronto

Interviewed by Ramona Cheng


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Investment

and volatility of a business. What are thekey considerations when you evaluateprospective opportunities in this sectorand how do you manage the risks/volatility in such an investment?

A: We focus on three main criteria whenevaluating an investment opportunity:

1. Attractivefinancial returns over7 to 10 years of our ownership

2. Certain strategic elements (suchas a China angle) where CIC caneffectively leverage or help capitalize

3. Ability to structure the deal in a waythat can be mutually beneficial weevaluate a prospective opportunitynot as a portfolio investment but astrategic partnership, focusing on

areas where CIC can add value as aprovider of long-term, patient capital

As a minority investor, conductingupfront, robust due diligence is keyto ensuring that we team up witha strong operational partner. With along-term perspective, we can ride outthe volatility of a sector if we make theright investment with the right partner.

Q: How would you compare todaysinvestment climate vs. 2009 (whenyou invested in Teck Resources) in themining and metals sector? Would youpursue opportunities independent ofCICs investee companies in this sector?

A: Opportunities to invest in similarhigh-quality, large-scale assets in thedeveloped countries as a minorityinvestor are few and far between today(compared with 2009 when CIC investedin Teck Resources, for example). Mostof the low hanging fruit is gone orabout to be snapped up in this sector sothere is a scarcity factor for large-scale,high-quality assets. Unlike 2009 (the

period immediately after the GFC), thestrategic acquirers and the majors nowhave much stronger balance sheets withlots of liquidity to conduct acquisitions,resulting in more competition for

quality assets. You need to move fasterand stay ahead of the curve in todaysenvironment.

In areas where we can leverage thesector insights and operational expertiseof our investee companies, we wouldpursue opportunities either throughour existing investments in our investeecompanies or co-investments with them.

Q: China became the most acquisitivecountry during 2012 and has been veryactive in both domestic consolidationas well as overseas acquisitions. Do you

expect this trend to continue in 2013?Would China focus more in domesticconsolidation (structural adjustments inthe industry) vs. acquisitions abroad?

A:The urbanization and demographictrends in China suggest that thestrategic needs for resources willcontinue unabated. In general, giventhe terrain in China, it is often moredifficult and therefore expensive toextract in China, and the quality of thecommodities may not be as high asthose available abroad. As such, I expect

China will continue to be quite active inconducting both overseas acquisitionsas well as domestic consolidation.

Q: It was reported in Wall Street J ournal(Chinas CIC Makes Investing Shift,19 September 2012) that CIC is makingan investment shift to take a moreactive role in its investments overseasby co-investing with other privateequity funds. What are the implicationsof such an investment shift, if any, forprospective investments by CIC goingforward?

A: We have always adopted a two-prongedapproach:

1. Direct investments, such as ourinvestments in Teck Resourcesand The Shanduka Group in themining sector and Penn West inthe oil and gas sector

2. Investments in other private equityfunds as a LP [i.e. limited partner]

We are increasingly active in evaluatingco-investment opportunities with otherprivate equity funds since high-qualitydirect investment opportunities are fewand far between for minority investors.

Q: What is your outlook for M&A activityor investment opportunities in themining and metals sector in 2013?

A:The macro environment globally remainsquite uncertain and volatile whether itis the fear of thefiscal cliff in the US, orthe unresolved Eurozone crisis. Theseare symptoms of fundamental issuesthat have yet to be fully resolved. Andthese fundamental issues are expectedto continue to impact the globaleconomy, resulting in an uncertaininvestment environment.

Again, it is increasingly mission-criticalto do your homework upfront. Whileyou may come across opportunitiesavailable at an attractive valuation ina volatile environment, more in-depthdue diligence is often required. Theuncertain global economy, coupled bya capital-constrained environment, willlikely result in more M&A opportunities.The question is whether buyers wouldhave the courage to do the deals.


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SpotlightThe rise of a new class of investor

A key characteristic of 2012 deal activity wasthe increasing role of state-backed and financialinvestors in funding the growth of the miningand metals industry through M&A.

The mantra across the mining and metals sector over the lastdecade has been growthfirst, growth second and growth third.

As a result, capital has been consumed in eye-watering volumes;initially debt-fueled and driving scale and consolidation, followedby commissioned mega-projects that have strained balance sheets

and questioned commitment to shareholder returns.

Traditional capital providers have reduced their exposure tothe sector, and, as a result, a funding gap has opened that

increasingly seems to befilled by a new class of investor.

These investors tend to operate in the gray area between M&Aandfinance, often driving much needed capital into the sector

through complex and innovative M&A structures.

Share of deal value by acquirer (2011 and 2012) Share of non-traditional deals by acquirer (2012)

0% 20% 40% 60% 80% 100%

2012

2011

Financial investorsCommodity tradersOther

Industry acquirersState-backed acquirersOther sectors

Financial investorsCommodity traders

State-backed acquirersOther sectorsOther

0% 20% 40% 60% 80% 100%

Volume

Value

Our analysis shows that while industry-to-industry M&Aunsurprisingly dominated deal activity in 2012, the share of deal

value by non-traditional acquirers has grown year-on-year to

account for 31%of total deal value, compared with just 21%in

2011. State-backed andfinancial investors account for 69%and15%of this proportion, respectively.

Furthermore, 88%of outbound deal value by this group reflects

cross border acquisitions by Asian buyers (predominantlyfrom China, but also from J apan, South Korea and Singapore).

This may not come as a surprise: Chinese investment in global

State-backed acquirers(e.g., SOEs and J apanese

Trading Houses (J THs))

Financial investors

(e.g., sovereign wealth

funds (SWFs), privatecapital, hedge funds and

real estate holdings)

Commodity traders Acquirers from other

sectors such as automotive,technology, fertilizer and

utility companies, and

industrial conglomerates

Investor categories:

natural resources has been making the headlines in recent years.

However, the growth in the share of investment by such buyers,

during a slower year for M&A globally and the latest commoditycycle downturn, may be attributed to the following industry

developments:

The contraction of traditional funding sources.

Introspective behaviors of the large-cap producers, reducingtheir focus on cross-border M&A.

Greater focus by mining and metals companies onfinancial

returns and return on capital employed, rendering them less

acquisitive on a relative basis.

An outward focus by SOEs. State entities, as mandated by

their government owners, are increasingly looking overseas for

both investments in mineral resources and expansion of theirown operating capabilities.

The perceived value gap between management and market

valuations. Strategic buyers, particularly state-backed andcommodity traders, may have better visibility over the real

long-term demand situation in their respective markets. Thispotentially enables them to compete in the gap between thevalue placed on the business or project by the owners and the

value attributed by the market.

Counter-cyclical or through-cycle investment. Chinese

buying of assets and commodities tends to be counter-cyclical,as was demonstrated by a surge in outbound M&A after

thefinancial crisis of 2008. Chinese investors tend to have

long-term investment horizons and buy at what they perceiveto be bottom of the cycle to stockpile or secure future supply

at lower prices, at a time when other competitors may lack thecapital or shareholder support to make acquisitions.

Price volatility.Price volatility promotes the need to lock in rawmaterial supply at stable or predictable prices. Furthermore,

strategic buyers may be looking to secure positions that givethem greater influence over pricing through market share.


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Target level by share of deal volume (2012)

Stake acquired by share of deal volume (2012)

Minority stake Controlling stake

Financial investors

Commodity traders

Other sector acquirers

State-backed acquirers

0% 20% 40% 60% 80% 100%

Company level Asset level

Financial investors

Commodity traders

Other sector acquirers

State-backed acquirers

0% 20% 40% 60% 80% 100%

SOEs the global miners of the future?

At face value, state-backed investors are commonly motivated bythe need to secure a stable, long-term supply of raw materials,

technology or production capacity for national benefit. Typically,

SOEs from high consuming nations such as China, J apan and

South Korea are tasked with securing minerals (e.g. iron ore oruranium) either through offtake or equity ownership to supply

national demand (e.g., for steel or power).

SOEs, particularly from China, have typically been perceived as a

common group China, Inc with single purpose, bottomlessfinancial backing, and the unquestioning patronage of an all-powerful shareholder. Some well-publicized misadventures in

outbound M&A have done little to dispel this perception.

However, a closer look at some of the major SOE acquirers in

2012 reveals a different picture: the ultimate objective may not

have changed, but their broader strategic goals are transforming.SOEs today are pursuing internationalization, independence,

integration, commerciality and global competitiveness. They

consider themselves the global mining and metals companiesof the future. Like publicly-listed mining companies, they have

to compete with other SOEs for assets and for access to statefunding, and must demonstrate profitability and return oninvestment.

As a result, SOEs are increasingly commercially-focused,

aiming to:

Buy at a price that reflects shareholders best interests (whichincludes knowing when to walk away)

Use investments to educate local management on best practice

and transfer knowledge and skills to the domestic workforce

Invest in more than offtake SOEs are learning fromearly mistakes, with stated intentions of investing in local

stakeholders, knowledge and social development Operate as more than import/export vehicles by building their

own operating capability and resource base

Integrate and expand along the value chain internationally (via

a global footprint), vertically (through raw materials supply),

and laterally (through business diversification mining throughtofinancing and trading)

Despite these intentions, there is often a lack of agility due to

drawn out regulatory processes. Timing of a deal in a volatilemarket is critical: what looks like an attractive investment at

the point of initial offer may look very different a year later.

There is concern by vendors that doing a deal subject to SOE

regulatory approval has provided the acquirer with a free optionto renegotiate the deal if commodity prices fall. The protracted,

ongoing negotiations for the acquisition of Sundance Resourcesby Hanlong (Africa) Mining Investment saw Sundance accept a

revised offer in August.

The funding gap is being filled by private investorsand SOEs who may not be dislodged fromtheir newfound positions once the cautionaryinvestment environment recedes and traditionalinvestors return to the sector.

Mike ElliottGlobal Mining & Metals Leader

Ernst & Young, Australia

The buyers in 2012

There are subtle but important differences between the various

buyer groups different motivations, different approaches to

deal making, and different acquisition techniques. We look here atsome of the groups that have been prominent buyers this year.


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The deal has been subject to delay in receiving regulatory

approval, leading to a reduced offer price that reflected the

change infinancial markets since the original agreement wasstruck in October 20112. Some SOEs are attempting to address

this by making approaches when state support for the deal has

largely already been secured.

Activity by J apanese trading houses was relatively muted in

2012. We expect an increase in activity as many set out their newmultiyear investment cycles in 2013, looking to Asian customersfor demand, and international markets and partners for supply.

Financial investors taking minority stakes

In 2012, financial investors (such as private capital, investmentfunds, SWFs and real estate holding companies) were

predominantly looking to secure toehold positions in listed

mining and metals companies in order to generate investmentreturns. Nearly 80%of deals by this group were for minority

(non-controlling) stakes at the company level, with average stakesizes of 12%. Gold, coal and copper were the most-targeted

commodities. The value and share of investments by this group

actually declined year-on-year to $4.8b (5%) from $10.4b (6%),perhaps counter-intuitively given that mid-2012 would seem to

indicate the bottom of the cycle. This may be a reflection of seller

reluctance, and also an element of risk aversion among investorsamid price volatility in key commodities.

Investors in this group were varied in form and geographically

widespread, including Weather Investments II, the investment

vehicle of prominent Egyptian investor Naguib Sawiris, whichacquired Canadian gold producer La Mancha Resources

for $494m, at a 55.6%premium to the reference price3.The acquisition of close to a 5%stake in Polyus Gold by

Chengdong Investment Corporation, a subsidiary of CIC

International Co., Ltd., signaled thefirst major foray (albeit via aminority stake) into one of Russias strategic sectors perhaps

the beginnings of future inbound investment into Russia. CIC has

reportedly set aside $1b for Russia-China co-investments via theRussian Direct Investment Fund4.

2 Sundance accepts revised Hanlong offer of 45 a share, Sundance Resources regulatory

announcement, 24 August 2012.3 La Mancha reaches definitive agreement, La Mancha Resources investor press release,13 J uly 2012.4 Sale of shares and GDRs, Polyus Gold International press release, 30 April 2012; The RussianDirect Investment Fund (RDIF, 60%) and China Investment Corporation, WPS: Banking and StockExchange, 13 J une 2012, via Factiva.

SWFs have increased their investment activity, driven by a

confident view about the long term fundamentals for the sector

and attractive asset prices in the broad absence of traditionalbuyers. Temasek of Singapore, for example, has stakes in

Turquoise Hill, Inmet Mining and Mosaic. However, there is also

growing evidence of the use of specialist funds, such as a reported$500m fund set up in Australia, co-managed by an Australian

fund and the local arm of a global investment bank5.Private capital also stepped in tofill the funding gap faced by

juniors in 2012. US-based investment fund manager Luxor

Capital made a cornerstone, controlling investment in gold junior

Crocodile Gold, with a view to exiting via a future refloating ofits shares in the public market at a higher price6. We expect

an increase in activity by private equity in 2013 asfirms

opportunistically acquire assets that present the prospect ofrelatively quick returns as commodity prices begin to recover.

However, without some visibility over near-term future returns, it

is difficult for traditional private equity to manage their risk of exitin three tofive years.

Some high-profile privatefinance acquisitions this year metwith contention and turned hostile. The hostile joint bid forBotswana-focused copper miner Discovery Metals by Chinese

private equityfirm Cathay Fortune and investment fund China-

Africa Development Fund was one such example. DiscoveryMetals directors advised shareholders to vote against an offer

they deemed neither fair nor reasonable7. The bid has now

lapsed. More generally, such hostility perhaps reflects a broaderperception by sellers that financial investors are looking to exploit

the current weakness in valuations, and bring little technical or

industry expertise to the table. Financial investors argue that theirinterests are aligned with those of the shareholders: maximizing

per share shareholder wealth, which means ensuring that

projects grow and are successfully delivered. Interchina ResourcesHoldings addressed its own lack of industry experience by

entering the sector via a joint venture with a Chinese investment

fund experienced in the operational and technical aspects of themining industry8.

5 Chinas top fund changing strategy, Canberra Times, 27 J uly 2012, via Factiva.

6 Luxor Capital Group issues open letter to shareholders of Crocodile Gold, Luxor Capital Grouppress release, 16 February 2012.7 DML Board recommends shareholders reject takeover offer, Discovery Metals ASXannouncement, 23 November 2012.8 Discloseable Transaction, Interchina Holdings Company regulatory announcement,2 May 2011.

The J apanese trading houses will be lookingto return investment to the sector, which willcontribute to an expected uptick in M&A in 2013.

Kunihiko TaniyamaJ apan Mining and Metals Transactions Leader

Ernst & Young, J apan


15/64


Commodity traders more than toe-dipping

Commodity traders have traditionally secured supply throughofftake and sourcing agreements. However, the model is changing,

with traders seeking greater integration and operational influencethrough direct ownership of producing assets for commercial long-

term benefit. Glencore International is setting the bar in respect of

integration, not least through its merger with Xstrata that will seea significant share of its business made up of controlled industrial

assets supplying commodities for its marketing activities.

Trafiguras increase to 100%of its holding in Iberian Mineralsthis year represented its own efforts to build strategic holdings

in mining assets to complement its trading activities building a

standalone mining concern9 to improve market access.

Commodity traders accounted for only a small proportion ofdeal value by external acquirers at $1.1b (1%), compared with

$7.3b (4%) in 2011. Iron ore, copper and coal were the mosttargeted commodities, with traders preferring to make outbound

investments via the relatively lower-risk acquisition of minority

stakes in listed Australian and Canadian juniors. Noble Group

entered into a proposed strategic agreement with Australianjunior Aspire Mining in early 2013, which could see a series

of debt- and equity-funded initiatives ultimately designed todeliver port and rail solutions for the Ovoot coking coal project in

Mongolia.

Other-sector investors managing volatility

Price and supply volatility drove integration deals by acquirers

from other industries, just as we have seen in the steel industry.

Coal, rare earths, lithium, iron ore and copper were targeted, withbuyers from the power, automotive, chemicals and renewable

energy sectors, among others, acquiring stakes through company(rather than asset-level) takeovers.

The strategic investment and offtake agreement between

Norwegian fertilizer distributor Yara International and North

American IC Potash was one such example. Yara sought upstreamexposure to mitigate thefinancial impact of being structurally

short in its value chain. State-backed South Korean energy

company KEPCO acquired a strategic 14%stake, including a futureofftake provision, in Canadas Strathmore Minerals to secure

supply for South Koreas nuclear power industry.

9 Developing new production sources and diverse income streams, Trafigura, http:/ /www.trafigura.com/investments/exploration-and-mining-group/exploration-and-mining-group-case/

What does this mean for the industry?

We expect to see a continued and growing role for strategic and

financial buyers in the years ahead. Many of the characteristics

that have driven or facilitated this growth in 2012 are likely tocontinue in 2013, not least the overarching need to secure long-

term sources of mineral supply.

These types of deals are natural and not new to the sector.The real question is whether such deals would have been

consummated had traditional debt or equity capital been available

to the host investee. On a case-by-case basis it is difficult to judge;but what is clear is that these types of investment will only grow in

popularity if capital markets continue to be constrained in 2013.

Sustained price volatility is likely to drive the continued pursuit

of vertical integration by metals companies via direct equityholdings in mining companies to secure supply and manage

costs. An integrated steel and mining business is likely to be

more bankable and command higher investor confidencebecause of its potential for relatively higher margins, lower

volatility of earnings, lower effective tax outflow and stability of

overall cashflows. However, Ernst & Young research has revealedthat vertical integration by steel into mining also brings in the risks

of the mining business and may not always have a positive impacton enterprise value10. Alternatives to legally owning mining

businesses may be explored, such as commodity price hedging

and long-term supply contracts for security, or capping the levelof shareholdings in mining businesses.

As the ambitions of state-backed entities become increasingly

international and independent, competition for quality projects

will intensify. J unior companies are, through lack of choice,becoming progressively more innovative in their pursuit of

funding. With this may come higher value expectations and

increased confidence in the negotiation of investment terms;owners of quality projects will be reluctant to sell if competition

is high. This will be matched by increasing sophistication on thepart of state-backed investors as they learn to transact across the

borders of the global mining and metals industry.

10 Global steel 2013: a new world, a new strategy, Ernst & Young, J anuary 2013,www.ey.com/miningandmetals.


16/64


Mergers &acquisitions

Commodity analysis

Country analysis


17/64


in the worlds largest titanium dioxide producer, Richards Bay

Minerals (RBM), by acquiring BHP Billitons divested stake, is

one such example.

A few large deals focused on geographical expansion were also

completed, involving acquisitions of assets in traditional (low risk)

mining jurisdictions. Among the other mega deals, downstreambusinesses and Asian sovereign investors acquired assets

overseas to secure long term supply of raw materials.

Global macro-economic uncertainties took center stagein 2012, creating volatility in the equity and commoditymarkets. This severely hampered M&A activity as capitalbecame constrained and greater uncertainty found itsway into deal valuations.

The decline in commodity prices exposed margins to rampant

industry-wide cost inflation. It is estimated that the industryexperienced cost inflation of between 10%and 15%in 2011,

with overall cost inflation averaging roughly 5%7%in the last

10 years11. Furthermore, cost overruns at upcoming capitalprojects, running into billions in some cases, have become

commonplace.

As a consequence, companies shifted gear from growth forgrowths sake to capital optimization during 2012, beginning

with a review of existing portfolios. With low cost, long life assets

(tier-one) the priority, investments in massive capital projects wererevisited (e.g., BHP Billitons Olympic Dam), non-core assets were

earmarked for divestment (e.g., Rio Tintos Diamonds business)

and M&A activity slowed.

Major $10b-plus deals have remained elusive since the GFC,

with the exception of BHP Billitons $11.8b acquisition of

oil and gas company, Petrohawk Energy, in 2011 suchtransformational deals gave way to low risk and strategic M&A in

2012. However, this could change in 2013, with the closing of

the Glencore International-Xstrata merger and Freeport-McMoRanCopper & Golds proposed oil and gas foray12.

Non-core asset divestitures gathered pace in the second half of

2012, as companies pushed to unlock capital. Only the largest

players were in a position to capture the once-in-a-decadebuying opportunities. Rio Tintos move to double its interest

11 Cost inflation is major theme for metals production: Deutshe Bank, CommodityOnline, 16 April 2012.12 Freeport-McMoRan Copper & Gold Inc. to Acquire Plains Exploration & Production Companyand McMoRan Exploration Co. In Transactions Totaling $20 Billion, Creating a Premier U.S. BasedNatural Resource Company, Freeport-McMoRan Copper & Gold news release,http:/ /www.fcx.com/ir/news_releases.htm, 5 December 2012.

Volume and value of deals (20032012)

Volume and value of deals by size (20032012)

Volume

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

200

400

600

800

1,000

1,200

0

50

100

150

200

250

Value($b)

Volume$1b

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20112012growth

Volume 475 596 564 701 903 919 1,047 1,123 1,008 941 -7%

Value ($m) 46,182 26,350 65,430 175,713 210,848 126,884 60,035 113,706 162,439 104,014 -36%

Average value ($m) 97 44 116 251 233 138 57 101 161 111 -31%

Median value ($m) 4.4 3.1 4.8 6.2 7.2 6.0 3.2 5.2 5.6 5.0 -12%

Share of mega deal value by M&A theme (2011 and 2012)

0% 20% 40% 60% 80% 100%

2012

2011

EYjc]l]fljq'\an]jka[YlagfDgojakc\ge]kla[[gfkgda\Ylagf!

?]g_jYh`a[]phYfkagfKljYl]_a[kmhhdq'k][mjalq!Dgojakc]paklaf_klYc]!


18/64


Mega deals (2012)

Rank Value($m)

Type Target Name TargetCountry

Targetcommodity

Acquirer Acquirer Country Acquirercommodity

Share (%)

1 9,432 Domestic Sumitomo MetalIndustries

J apan Steel Nippon Steel J apan Steel 100.0

2 5,200 Cross border De Beers South Africa Diamonds Anglo American UK Diversified 40.0

3 3,735 Cross border Inoxum Germany Steel Outokumpu Finland Steel 100.0

4 3,344 Cross border Quadra FNX Mining Canada Copper KGHM Polska Miedz Poland Copper 100.0

5 3,309 Cross border Roy Hill Holdings Australia Iron ore Posco; STX Corp; Marubeni South Korea; Japan Steel; Tradingcompany

25.0

6 2,900 Domestic/

Cross border

Anglo American Sur Chile Copper Codelco; Mitsui Chile; J apan Copper 29.5

7 2,823 Cross border Usiminas Brazil Steel The Techint Group Argentina Steel 27.7

8 2,345 Cross border European Goldfields Greece Gold Eldorado Gold Canada Gold 100.0

9 2,299 Domestic Aston Resources Australia Coal Whitehaven Coal Australia Coal 100.0

10 1,910 Cross border Richards BayMinerals

South Africa Titanium Rio Tinto UK Diversified 37.0

11 1,521 Cross border Gloucester Coal Australia Coal Yankuang Group China Coal 100.0

12 1,500 Cross border Tonkolili Iron Ore Sierra Leone Iron ore Shandong Iron & Steel Group China Steel 25.0

13 1,483 Cross border Minefinders Mexico Silver/lead/

zinc

Pan American Silver Canada Silver/ lead/zinc 100.0

14 1,411 Cross border Kazzinc Kazakhstan Zinc Glencore International Switzerland Trading company 18.9

15 1,335 Cross border Exxaros mineral

sands operation

Australia Titanium Tronox US Titanium 100.0

16 1,288 Cross border Neo MaterialTechnologies

Canada Rare earths/lithium

Molycorp US Rare earths/lithium

100.0

17 1,283 Cross border Anvil Mining DemocraticRepublic ofCongo

Copper China Minmetals Corporation China Trading company 100.0

18 1,271 Cross border Extract Resources Namibia Uranium China Guangdong NuclearPower Holding

China Power andutilities

42.7

19 1,250 Cross border First QuantumMinerals residualassets

DemocraticRepublic ofCongo

Copper Eurasian Natural Resources UK Diversified 100.0

20 1,201 Domestic Laiwu Steel China Steel J inan Iron & Steel China Steel 100.0

21 1,172 Domestic Yima Coal IndustryGroup coal assets

China Coal Henan Dayou Energy China Coal 100.0

22 1,128 Cross border BASFs fertilizerplant

Belgium Fertilizer MKHK YevroKhim(EuroChem)

Russia Potashphosphate

100.0

23 1,037 Domestic Geotransgaz

and Urengoi GasCompany

Russia Oil and gas AK Alrosa Russia Diamonds 90.0

24 1,034 Domestic Eramet France Magnesium FSI France Financialinvestor

25.7

25 1,012 Cross border Grande Cache Coal Canada Coal Winsway Coking CoalHoldings; Marubeni

China; J apan Coal; Tradinghouse

100.0

26 1,009 Cross border Kalahari Minerals Namibia Uranium China Guangdong NuclearPower

China Power andutilities

100.0

27 1,000 Domestic Bumi Indonesia Coal Borneo Lumbung Energi Indonesia Coal 23.8


19/64


Minority stake acquisitions in junior companies*

Acquirers of minority stakes in junior companies, by share of dealvalue (2011 and 2012)*

Two main themes dominated M&A across the sector in 2012:

1) Low risk M&A

This type of deal focused on domestic consolidation for

synergies and pooled resources, in response to cost inflationand fund raising difficulties. Quite often, low risk M&A

transactions were pursued to achieve synergies in shared

facilities, infrastructure, blasting etc. for instance, the mergerof Australian coal producers, Whitehaven Coal and Aston

Resources. Alternatively, low risk deals were aimed at gaining

greater control over an asset where a stake was already held,such as Anglo Americans acquisition of an additional stake in

the worlds largest diamond producer, De Beers.

2) Strategic M&A

Such deals focused on more than just the transaction. Themyriad of state-owned and sovereign wealth investors looking

to acquire assets in return for security of supply via offtake

are such examples, as in the case of Shandong Iron & Steelsminority stake acquisition in Tonkolili Iron Ore. Strategic M&A

deals provided much needed capital to the target entity in acapital-constrained market, with larger companies acquiringtoehold stakes in prospective junior explorers. Such deals

enabled acquirers to take advantage of equity devaluation inthe junior segment to secure future growth options a strategy

that HudBay Minerals actively pursued in Peru, for example.

Another emerging trend in 2012 was the increase in the number

of deals done for minority stakes rather than full-takeovers,

which were very much the domain of the debt-financedconsolidation phase that took place between 2005 and early

2008. Consequently, these minority stake acquisitions

increased options for juniors, be it exit through an outright sale,or funding via a strategic investment that lends confidence

to a project and enables futurefinancing to be arranged.This trend is likely to continue asfinancing options remain

tight and large-cap producers look to recycle capital both

being factors that will drive the pursuit of juniors, as well asstrategic partners on projects.

2011

2012

State-backed acquirersIndustry acquirers Major/Mid-tier

Financial investorsIndustry acquirers J uniorCommodity tradersOther sector acquirers

0% 20% 40% 60% 80% 100%

*Represents deals where the stake acquired, and aggregated stake owned after, was less than 50%.

2010 2011 2012

Volume

Value$m

VolumeValue $m

0

50

100

150

200

250

0

1,000

2,000

3,000

4,000

5,000


20/64


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

66% 65% 65%

60% 59%

43%

67%

55%52%

34% 35% 35%

40%41%

57%

33%

45%48% 48%

52%

Share of domestic Share of cross border

Share of domestic and cross border deals (20032012)

Valuation gapThe changing industry landscape in 2012 made deal executiondifficult, with some major deals falling through or facing delays

due to mismatched expectations on deal valuations and/or fundingdifficulties. In one such deal, the privately-owned Tinkler Group

made a $5.5b takeover bid for Australias Whitehaven Coal,

at a time when the latters share price had dropped to nearlythree-year lows. However, the bid was eventually abandoned as

deteriorating coal market conditions jeopardized efforts to secure

funding for the deal13.

Buyer and seller agreement on deal valuation became difficult toachieve in 2012 due to the growing divergence between mining

and metals equities and commodity prices. Macro-economic risks

weighed heavily on mining and metals equities and commodityprices alike, but this is where the similarities ended. Commodity

prices eventually found support from positive long-term

fundamentals, especially once the industrys capital strike tooka sizable chunk of planned future supply off the market. On the

other hand, mining equities were penalized for challenges and

risks at the producer-level, particularly escalating operating costsand capital cost overruns. As a result, share prices fully reflected

the negative impact of commodity price falls, but did not benefitfrom an equivalent upside when commodity prices recovered,

leaving many sellers searching for large premiums which were

difficult for buyers to swallow.

Sellers were unwilling to accept lower valuations based ontheir depleted share prices in 2012, on the grounds that this

unfairly reflected near-term uncertainties, rather than the

long-term potential of their assets. Consequently,negotiations are taking longer and becoming more complex,

resulting in sluggish M&A at best.

13 Australias Tinkler pulls $5.5 billion Whitehaven bid, Reuters, 24 August 2012; Tinkler lobslate bid for coal miner, The Sydney Morning Herald, 14 J uly 2012.

Cross border activityThe growing scarcity of large, quality resources in traditionalmining jurisdictions has led to increasing cross border activity over

the years. Companies have increasingly ventured into emergingand frontier regions to secure metal in the ground, taking on

greater political risk and even partnering with host governments

for social and infrastructure development.

The year 2008 marked a cross-over, with cross-border deal

activity overtaking domestic consolidation, following a long periodof convergence. However, the GFC reversed this trend dramatically

as companies looked toward domestic consolidation, seeking

synergies and greater financial viability. With such significantcapital flows out of Asia, post the GFC, this trend appears to have

reversed once again, boosting cross-border deal share to more

than 50%of deal volume in 2012.

The risks associated with resource nationalism are no longer

restricted to the frontier and emerging markets alone. The

introduction of the Mineral Resources Rent Tax (MRRT), a carbontax and increases in state royalties in Australia during 2012 is

case in point. Infrastructure bottlenecks have also become a

concern in mature mining countries, including South Africa andAustralia. Furthermore, the mining-led capex boom in traditional

mining and metals regions has made cost inflation in these

countries far more pronounced compared with general industrylevels. Therefore we are beginning to see a more level playing

field for M&A across traditional low risk countries and medium

risk destinations.


21/64


Target destinations in cross border deals by risk level (2011 and 2012)

Market share(by proceeds $m)

2007 2008 2009 2010 2011 2012 Y-o-Y growth

Asia Pacific 18,045 29,611 20,505 38,955 38,297 41,055 7%

Africa 7,271 1,844 3,285 16,657 20,282 19,940 -2%

Latin America 16,147 16,924 12,139 23,957 22,084 13,872 -37%

North America 143,369 48,520 15,420 22,200 54,187 13,306 -75%

Europe 22,976 26,432 4,608 6,613 3,564 10,424 192%

CIS 3,040 3,553 3,836 3,718 23,894 5,418 -77%

Middle East - - 242 1,605 131 -

Total 210,848 126,884 60,035 113,706 162,439 104,014 -36%

Value of deals by target region (20072012)

Meanwhile, companies held back from making investments in

higher risk countries in 2012, suggesting that these deals were

possibly harder to justify amid greater shareholder scrutinyon capital allocation. The activity across frontier regions, as a

result, tended to be conducted by Chinese SOEs for resource

security. Frontier markets hold the promise of robust demandfrom an emerging middle class and are also home to tier-one

mineral assets. Competition for the latter has greatly intensified,particularly among BRIC and emerging market players, withstrong and steady support from their respective governments.

China and Indias push for bilateral trade agreements with severalAfrican nations is testimony to this. The Democratic Republic of

Congo (DRC), Sierra Leone and Namibia followed South Africa as

top African destinations primarily targeted by Chinese SOEs forcopper, iron ore and uranium, respectively.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sharebyvalue

2011

24%

22%

54%

2012

20%

53%

26%

Low risk Medium risk High risk

Note: numbers may not sum to column totals due to rounding.


22/64


Australia was the top destination for mining and metals M&A

in 2012, where M&A targeting Australian assets (inbound anddomestic) accounted for 13%($14b) of global deal value, driven

by increased domestic consolidation, particularly among mid-

cap coal miners to achieve synergies and mitigate rising costs.Although subdued by announcements of capital cost blow outs,

inbound deal activity in Australia was driven by investments from

Asian acquirers into coal and iron ore. China was the secondmost targeted destination, due to Government-led domestic

consolidation to centralize control over Chinas fragmented coal

and steel industries.

We are also beginning to see growing interest in many of Europes

resource-rich countries, driven by growing political support

in the region to develop the mining industry in these low-riskjurisdictions, including Turkey, Sweden and Spain. Processing

and manufacturing facilities in Germany were targeted by players

looking to forward-integrate, with the added benefit of access totechnological know-how.

Inbound M&A in Latin America was subdued by intense community

opposition to mining, large capital cost blow outs, water andenergy constraints, and growing protectionism across the region.

Increasing demand for raw materials in the Asia-Pacific region

drove Asian acquirers overseas to secure supply, with China

and J apan, respectively, emerging as the most acquisitivecountries in 2012. Asian SOEs and trading houses dominated

this outbound activity. China, J apan and South Korea, together,accounted for over a third (37%or $39b) of global deal value

in 2012.

North America was notably quiet in 2012, falling behind Europe

as an acquiring region. The marked decline in the regionsM&A activity can be partly attributed to reduced domestic coal

consolidation in the US due to difficult market conditions, resulting

from weak demand, depressed prices and the threat of cheapnatural gas. The overall slowdown in Canadian M&A activity was

characterized by fewer inbound investments from the US, subdued

domestic consolidation and smaller overseas acquisitions.

Market share(by proceeds $m)

2007 2008 2009 2010 2011 2012 Y-o-Y growth

Asia Pacific 18,965 46,148 20,197 49,688 58,924 47,903 -19%

Europe 90,084 24,074 11,182 7,528 28,438 23,035 -19%

North America 77,886 35,057 13,661 35,481 48,964 16,961 -65%

Latin America 7,653 8,079 8,181 14,799 3,987 9,287 133%

CIS 12,348 13,015 5,248 4,196 19,457 4,131 -79%

Africa 3,526 511 1,419 1,480 2,437 2,633 8%

Middle East 375 - 72 533 231 53 -77%

Unknown 12 - 75 - - 9

Total 210,848 126,884 60,035 113,706 162,439 104,014 -36%

Value of deals by acquiring region (20072012)



23/64


Commodity analysisSteel led global deal value as the most targeted commodity, withdomestic consolidation being the main theme, characterized

by strategic moves to protect margins and remain competitive,including access to high growth markets, consolidation and

vertical integration. The all-share merger of J apanese steel majors

Sumitomo Metal Industries and Nippon Steel was the largest dealof the year, valued at $9.4b, which was driven by the need to

remain competitive and achieve cost saving synergies, as well as

to gain leverage over raw material suppliers14.

Coal deal activity was also largely driven by domesticconsolidation this past year in the Asia-Pacific, compared with

2011 when the majority of this activity took place in the US.

14 Nippon Steel & Sumitomo to Push Cost Cuts Amid Competition, Bloomberg, 1 October 2012

21.4

Other*

are earths/lithium

Uranium

Titanium

Silver/lead/zinc

Diamonds

Iron ore

Gold

Copper

Coal

Steel

14.2

13.4

7.3

5.3

4.0

3.9

3.6

2.3

10.6

17.9

142

20

26

30

33

47

49

58

78

101

339

Other*

Rare earths/lithium

Nickel

Mineral exploration

Uranium

Steel

Silver/lead/zinc

Iron ore

Copper

Coal

Gold

Value of deals by target commodity ($b) (2012) Volume of deals by target commodity (2012)

*Other: includes potash/phosphate, nickel, tantalum, vanadium, aluminum, nickel, potash,diamonds, limestone, PGMs, tungsten, chromite, molybdenum, graphite, tin, silica, gypsum,molybdenum, magnesium, niobium etc.

*Other: include potash/phosphate, nickel, tantalum, vanadium, aluminium, nickel, potash, diamond,limestone, PGMs, tungsten, chromite, molybdenum, graphite, tin, silica, gypsum, molybdenum,magnesium, niobium etc.

Power utilities and trading companies were also active acquirers

of coal assets to secure supply. Looking ahead, an energy crisis

in India in early 2012 highlights the countrys acute shortageof coal, making it a strong contender for overseas coal assets

in competition with China, J apan and South Korea. Gold M&A

activity has been dominated by domestic consolidation for years,but interestingly witnessed a shift in focus to outbound growth in

2012. Copper also witnessed a marked increase in cross borderacquisitions, driven by the need for resource security amidgrowing competition for scarce, quality assets.

Vertical integration was the key driver for deals targeting rare

earths and lithium, as well as energy-and-steel-making rawmaterials. Asian acquirers actively pursued uranium and iron ore

assets overseas to secure their long term supply chains.


24/64


M&A outflows for key nations

5.1

9.9

1.74.5

9.1

2.2

Canada

China

Australia

Colombia

Outbound (bubble size =deal value)Domestic (bubble size =deal value)

Greece

Namibia

2.3

9.1

12.6

0.4

US

1.31.8

0.5Democratic

Republic of Congo

1.3

1.5

Argentina

Chile

PapuaNew Guinea

0.6

1.5

2.3

0.4

0.9

7.1

Sierra Leone

0.7

1.4

Kazakhstan

1.1

Switzerland

J apan

0.8

0.6

0.1

0.8

2.5

0.5

2.8

Mexico

2.3

South Africa

10.8

UK

3.0


25/64


Capitalraising

A changing investment

landscapeBonds

Syndicated loans

IPOs

Follow on issues

Convertible bonds


26/64


Capital raising by asset class proceeds (20072012)

Debt and equity proceeds by month (2012)Economic uncertainty created volatility and risk aversionamong investors, limiting options for higher risk capitalraisers, but generating unique opportunities for theindustrys relative safe bets the investment grade.

The fall in overall capital raised in 2012, to $249b from $340b in

2011, reflects changing investment appetite:

Scaling-back of capital outlay (both organic and inorganic) bythe majors

A volatility-led structural shift in investor preferences from

equity tofixed income instruments

A fundamental, if gradual, shift in the makeup of fundingsources, from traditional capital markets to alternative investors

and unconventional funding structures

This change manifested itself in 2012 in the form of recordbond proceeds (largely by investment grade issuers), a

withdrawal from the prohibitive commercial loans market, and

the decline of traditional equity funding in the face of punishingmarket valuations.

Proceeds$b

Equitie

sindexmovement

J an Feb Mar Apr May J un J ul Aug Sep Oct DecNov300

400

500

600

700

800

900

1000

0

50

100

150

200

250

300

350

HSBC Global Mining & Steel indexDebt Equity

For thefirst year since 2009, we witnessed anoverall decline in the amount of capital raised bythe industry a consequence of the complex andevolving capital raising environment that emergedin 2012.

Emily ColborneStrategic Analyst, Mining & Metals

Ernst & Young, UKI

2007 2008 2009 2010 2011 2012

IPOs 21,400 12,406 2,987 17,948 17,449 1,388

Follow ons 66,802 48,751 73,806 49,705 49,745 25,950

Convertible bonds 12,865 12,238 14,431 5,477 2,365 3,537

Bonds 36,358 38,146 61,016 72,502 83,804 112,539

Loans 110,787 171,691 62,420 183,875 187,059 105,981

Total 248,212 283,232 214,660 329,507 340,422 249,394



27/64


Changing behaviorsThe implications of these variouscharacteristics and drivers are manifold.

The new investment landscape requires

preparation, agility and innovation from allparticipants.

Companies need to ensure the right balancebetween focus on short-term returns andinvestment in longer term growth. The rise

of long-term counter-cyclical investors,including streaming companies, should seebetter alignment of funding to the strategic

objectives of borrowers/issuers. Both partiesare mutually dependent on the success ofthe project.

Smaller companies need to be realistic intheir projections about financing needs.

Smaller funding requirements, linked toachievable, phased development targets,

are more likely to attract investors, andless likely to result in disappointment of themarket further down the line.

A thorough understanding of the rangeof funding structures and sourcesavailable, and their associated benefits

and risks, is required.

Are the costs of capital commensurate

with the immediate funding need?

Are shareholders comfortable with theproportion of ownership of your business

you are conceding?

On what terms are you locking in offtakeof your future supply, and what are theimplications on your long-term growth?

What impact will this funding partner orstructure have on your ability to secureother sources offinance?

Diversifying sources and types of funding willhelp to spread risk, drive efficiency and limit

exposure or loss of control to any one singleparty. Building of relationships with thewidest range of potential capital providers

will help to secure the right funding at theright price.

A changing investment landscapeThe drivers and implications of this changing environment are best understood

from the differing perspectives and interdependent relationships of the industrys

various players.

The major producers

2012 saw a shift in focus by the major miners, from capital expenditure tocapital optimization. Shareholders have become increasingly frustrated by

weakening share prices and lower profitability in the face of huge plannedcapital spending. As a result, companies have faced pressure to rethinktheir capital allocation decisions a pressure that may manifest itself in

2013 as a greater call for dividends. Companies have responded in 2012

with a focus on capital recycling through ongoing appraisal of portfolios,redistribution and diversion of capital from higher cost to higher return

projects, and divestments of non-core assets. We see the industry goingthrough a phase of proving it can provide shareholders with appropriatereturns before longer term growth options are really back on the agenda.

This shift also reflects the possibility that we are entering the next phasein the commodity and capital cycle: from a period of price-driven volume

growth, to a new chapter of price-moderated margin growth. As a result,the investment grade majors are raising capital, predominantly in the bondmarkets, to take advantage of favorable terms for refinancing, rather than

to fund major acquisitions or capex programs. The focus in 2013 will be on

maximizing returns on capital while maintaining credit rating strength.

The steel producersSteel producers faced further tough conditions in 2012, as reduceddemand led to squeezed margins and deterioration in credit quality. As a

result, steel producers are largely focused on restructuring rather thangrowth, through the likely route of asset sales, external fundraising via thebond and loan markets, and emergency rights issues in an effort to repair

balance sheets.

The mid-tiers and advanced juniors

Companies are typically high yield or unrated, limiting access to the

corporate bond and loans markets, and with little appetite to dilute existingshareholdings in the equity markets. That said, a number of companies in

this group have benefited from the swing to a stock selective mindset

by institutional investors looking for quality, de-risked investmentopportunities presenting relative visibility over potential near-term returns.

Companies have also exploited limited but expedient opportunities toaccess the high yield and US private placement markets. Long-terminvestors are playing an important role, securing toehold positions in the

mid-tiers via equity and offtake financing to helpfill the funding gap.

The early-stage explorers

The capital strike by risk-averse equity investors meant that earlystage junior companies were faced with very few options in 2012. Lastresort funding options are coming to the fore, often bringing loss of

control over projects or onerous terms. Companies are in survival modeonce again, with a symptomatic number of companies exhibiting signs

offinancial distress.


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Bonds

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

50

100

150

200

0

20

40

60

80

100

120

NumberofIbondissues

Proceed

s$b

NumberProceeds

Bond volume and proceeds (20002012)The credit environment in2012/2013Standard & Poors (S&P) has predicted a tough year ahead for

mining and metals companies in 2013. Credit rating actionratios swung to the negative over 2012 (more downgrades

than upgrades). However, the downgrades and negativeoutlook largely reflect challenging market conditions forEuropean and Asia-Pacific steel makers and North American

coal producers. Many of the major diversified miningproducers have been given stable outlooks, underpinned by

continued strong cashflows, manageable debt to equity ratios,

and in light of the scaling back of planned capital expenditures.

Credit rating quality is a strategic priority in the capitalagendas of many mining and metals companies, given the

attractive pricing and access to capital that the highest-rated

issuers have been able to exploit in the bond and commercialdebt markets. ArcelorMittal reportedly said that a downgrade

to sub-investment grade status would result in increasedinterest costs of $100m per year15.

A lower commodity price environment can quickly weaken

credit ratios and we may see incidences of emergency

fundraising among leveraged mid-tiers exposed to unexpectedprice weakness and among steel producers in the face of

continued challenging market conditions.

15 ArcelorMittals debt cut to junk by S&P on steel weakness, Bloomberg, 2 August 2012.ArcelorMittals long-term issuer ratings were downgraded by S&P to BB+from BBB inAugust; by Moodys to Ba1 from Baa3 in November; and by Fitch to BB+from BBB inDecember.

S&P ratings migration mining and metals companies (2012)

Q112 Q212 Q312 Q412

65

2

4

7

1718

DowngradesUpgrades

16

Mining and metals companies raised bond proceeds of $113b

in 2012, using bond markets to diversify away from their past

reliance on bank debt. Bond issues by the top six diversifieds16alone, at $42b, comfortably exceeded all previous records.

The corporate bond market witnessed a virtuous cycle ofhistorically low benchmark rates encouraging demand from

investors for yield, which in turn is reducing borrowing costs forinvestment grade issuers. The average coupon on 510-year

US dollar notes issued by investment grade mining and metals

companies fell to 3.9%(from 4.7%in 2011), masking individualbond coupons as low as 1%on shorter tenors. In addition to

favorable pricing, demand is enabling issuers to refinance existingdebt and extend maturities.

Glencore International (rated BBB/stable by S&P) issued itsfirst

bond since its 2011 IPO. The 1.25b notes attracted an order

book in excess of 5b, allowing material price tightening and afinal print at 240bps over mid-swaps. BHP Billiton, which launched

its only US dollar issuance early in the year (achieving the lowestpricing of all mining issuers on equivalent bonds at 1%), launchedan AU$1b 3.75%bond due 2017 in October. This represented the

largest ever single-tranche Australian dollar bond by an Australian

company outside of the banking sector17, with over 80%of theorder book comprised of domestic investors. The issue, aimed at

diversifying its investor base and tapping local investor demand,

reportedly attracted an order book of over AU$8b and maytrigger a revival of the Australian bond market for both domestic

and international borrowers.

16 Anglo American, BHP Billiton, Glencore International, Rio Tinto, Vale and Xstrata17 BHP sellsfirst Aussie dollar bonds in more than a decade, Bloomberg, 9 October 2012.

Corporate bonds were the story of the year ascompanies took advantage of unprecedentedinvestor demand for high grade debt to raiserecord proceeds.

Nicky CrabtreeAssistant Director, Mining and MetalsTransaction Advisory Services, UKI

Source: S&P Ratings Direct. Represents foreign long-term issuer credit rating.


29/64


Coupon ranges on US dollar and Euro bonds by tenor (2012)

High yield bonds (volume of issue, 20112012)

1.7

2.8

4.85.0

9.8

8.2


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Loan volume and proceeds (20002012) Primary use of proceeds, by share of proceeds (2012)

2012 witnessed a significant, but not unexpected, fall in loan

proceeds to $106b as banks continue to reduce their exposure

to riskier assets in order to manage their reserve capitalrequirements under Basel III. The announcement in J anuary

2013 of a delay to full implementation of, and changes to, Basel

III liquidity requirements18 is unlikely to herald a significantchange in lending behavior in the year ahead, albeit providing

more time for banks to put required Basel III-compliant systems

in place. Many banks are already complying with minimumregulatory capital requirements, but the markets are pushing

for better standards, demanding considerably higher Core Tier 1

capital ratios than regulators minimum stipulations. As a result,banks remain focused on maintaining strong relationships with

quality corporates the highest grade borrowers and nationalchampions.

For mining and metals companies, the reduced availability of

bank debt inevitably increased borrowing costs with increasingly

restrictive covenants for all but the largest companies or those

offering clear opportunities for ancillary business. Averagespreads on leveraged loans widened to 389bps above the

benchmark, from 266bps in 2011. This perpetuated a two-tiermarket that has been taking shape for some time now: the largest

borrowing large, the rest borrowing little, or, indeed, not at all.

Glencore International exemplified the large for a second year,with $19b of loans closed for refinancing and in respect of its

merger with Xstrata.

18 Group of Governors and Heads of Supervision endorses revised liquidity standard for banks,Bank for International Settlements (BIS) press release, 6 J anuary 2012. Key elements of therevised liquidity standard includes delay of full implementation from 2015 to 2019 (with 60%ofrequirements to be met by 2015), and a change to the qualifying assets

200020012002 2003 2004 2005 2006 20072008200920102011 2012

50

0

100

150

200

250

300

350

0

50

100

150

200

Numberofloans

Proceed

s$b

NumberProceeds

Syndicated loans

Of the loans that were closed in 2012, more than half were

extend and amend transactions for existing facilities (usually on

better terms), meaning that relatively little new bank debtflowedinto the sector in the form of project or acquisitionfinance.

Project finance is increasingly being provided by non-traditional

lenders such as sovereign wealth funds, equipment providers,national/development banks, and strategic offtakers, in the form

of pre-finance arrangements. However, among the projects for

which traditional bank-syndicated projectfinance was closed inthe year were First Quantums Kansanshi copper mine in Zambia

($1b led by Standard Bank), KGHM Polskas Sierra Gorda SCM

Chilean copper project ($1b with a consortium of J apanese banks)and Tharisa Minerals PGM/chrome mine expansion ($132m, led

by HSBC, Absa Capital and Nedbank).

Outside of the syndicated loans market, we are increasingly seeing

customers providingfinance in return for offtake arrangements.For example, in August, Paladin Energy secured a $200m

prepayment from a major utility for a long-term offtake contractof uranium oxide. The prepayment was secured by the interest in a

Canadian uranium project.

$10b

$8b

$5b

$1b

$25b

$12b

$59b

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Volume of IPOs by primary exchange (2012)IPO volume and proceeds (20072012)

2007 2008 2009 2010 2011 2012

0

50

100

150

200

250

300

0

5

10

15

20

25

NumberofIPOs

Proceeds$b

Glencore

NumberProceeds

The value and volume of IPOs in 2012 retreated to their

lowest levels since at least 2007, and 2009, respectively, witha year-on-year 40%fall in volume and 81%fall in proceeds

(even excluding Glencore). Given the period of extreme andunprecedented crisis that 2009 represented, it is difficult tofind

logic in theindiscriminate

nature of the pull-back from equitiesand the apparently sentiment-driven behavior of the equitymarkets in 2012.

The $305m listing of Ivanplats on the Toronto Stock Exchange

(TSX) in October was the years bright spot and brought late hope

of a revival in confidence among equity investors and issuers alike.

IPO volume was made up of small-scale listings by junior

companies that opted to raise low proceeds with a view to

securing a public platform from which to raise future funds.Toronto and Australia were the markets of choice for

domestic IPOs.

IPOs

Cross border capital flows saw traditional developed markets

continue to fund exploration in Africa, South America andAsia-Pacific. Some companies secured the advantage of

cornerstone investors with a vested long-term interest in thesuccess of the project. Equipment, power and infrastructure

companies were among those gaining strategic toeholds in coaland copper projects. In afirst of its kind, China Nonferrous Mining,an Africa-based, Chinese-owned exploration company spun out

of China Nonferrous Metal Mining Group, listed in Hong Kong to

raise proceeds for the development of a copper project in Zambia.Perhaps this will prove thefirst of an emerging new method of

securing access to Africas resources by Chinese investors.

For the IPO markets to return in 2013, we will need to see relative

macro-economic stability driving momentum in equity markets.The signs during 4Q 2012 are promising, and we expect 2013 to

be a turning point for equity capital raising.

9

5

5

28

39

Other

London AIM

Hong Kong

Australian

TSXVenture


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Convertible bondsFollow on issues

Proceeds$b

2008 2009 2010 2011 2012

Metals all Mining >$1b Mining


33/64

Divestments are youleaving value on the table?

There is a strong appetite fordivestments in the sector,

where 43%of mining & metalsrespondents of Ernst & Youngs

recent Global Corporate DivestmentStudy revealed that they expect to

initiate divestment plans over thenext two years.

This enthusiasm is tempered by

caution around the economic

environment, and stakeholder andbuyer scrutiny.

Globally, 73%of respondents

surveyed (across all sectors) areleaving value on the table when

divesting assets. In our experience,there arefive leading principles

which should be applied by miningand metals companies in order to

maximize value and achieve speedof execution even in the current

challenging environment.

Valueexpectation

Behind schedule butsignificantly aboveprice expectations

9%

Behind schedule buteither near or belowprice expectations

42%

Ahead of schedule andsignificantly above price

expectations

e&y - capital & raising in mining metals

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