OREANDA-NEWS. March 19, 2009. Following two years of record M&A activity, 2008 has turned out to be a year of extremes, according to Mining Deals 2008, the annual review by PricewaterhouseCoopers of mining sector M&A activity, reported the press-centre of PricewaterhouseCoopers.

The earlier part of the year followed the previous year’s buoyant pattern before plunging in a sudden dizzying vortex in the final months.

As well as being a year of very high deal activity, 2008 was also the year of what might have been. The potentially sector transforming bid by BHP Billiton grabbed the headlines but there were many other announced transactions that did not complete. Deal volumes plummeted 61% in the fourth quarter of 2008 towards levels last seen in 2005.

Many companies that had spent the earlier part of the year doing deals or resisting unwelcome overtures finished the year looking at overstretched balance sheets, preparing for write-downs, and welcoming back potential buyers with open arms.

The most significant surge in deal activity came in Brazil with total deal value in South America as a whole rising dramatically from US8.7bn in 2007 to US22.8bn in 2008. US17.7bn of the region’s deal value was centred on Brazil – up nearly fivefold from the US3.6bn total Brazilian mining deal value of 2007.

A large increase was also seen in deals involving Chinese buyers with the value of deals rising fourfold from US\\\\$6.7bn in 2007 to US25.5bn in 2008. This trend is continuing and, in fact, increasing in 2009 with deals announced in February by Chinalco (a US 19.5 billion transaction with Rio Tinto), China Minmetals (a US 2.5 billion bid for Oz Minerals) and Hunan Valin (US 0.9 billion investment in Fortescue)

Tim Goldsmith, PricewaterhouseCoopers’s mining leader, comments:

“We are witnessing a unique deal environment that will reshape much of the sector’s ownership. The rapidity of commodity and equity price falls, combined with the immense financing constraints stemming from the financial crisis, has left the sector polarised between the strong and the weak.

“Chinese investors have an unprecedented window of opportunity to get in ahead of competitors and gain access to targets that might be denied to them in normal circumstances.”

Russian Federation and Commonwealth of Independent States
The largest foreign purchase was for US875 million by Russia’s biggest steelmaker, SeverStal OAO, for PBS Coals. The total value of deals involving assets or companies primarily located in the region rose 21%, from US20.9bn in 2007 to US25.2bn in 2008.

However, the step change in international expansion that had characterised activity by Russian companies in 2007 did not follow through as strongly in 2008. Mining acquisitions by Russian companies dropped back to US20bn in 2008 from US26bn the previous year. Much of the total was domestic activity with no foreign acquisitions to rival the 2007 US5.4bn purchase of Canada’s LionOre by Norilsk Nickel.

The largest foreign purchase was the US1.5bn purchase of UK–based nickel and gold producer Oriel Resources by Russian miner and steel maker, Mechel OAO, followed by SeverStal’s US875 million deal for Canada’s PBS Coals (see North America section on page 12). In Russia, a privatization of the Verkhnekamskoye potassium-magnesium salts deposit in the Ural region raised US2.3bn in a sale to four Russian fertiliser manufacturing and mining companies.

US10bn of the US20bn Russian deal total stemmed from the move to purchase a 16.66% stake in Norilsk Nickel by Interros. Holding, owned by Vladimir Potanin, already a major shareholder in Norilsk Nickel. The deal, which remains pending, is the latest stakebuilding move in the company which has also seen acquisitions by Oleg Deripaska whose Basic Element company controls aluminium producer Rusal. However, speculation about a merger between Norilsk Nickel and Rusal has not, thus far, been borne out.

John Campbell, metals and mining leader, PricewaterhouseCoopers in Russia, says:

“Looking forward the constraints and contrasts in the market will create their own impetus for deal momentum. Entities with balance sheet strength will regard the current environment as a buying opportunity although many may be content to bide their time for the right conditions to emerge.

“Access to equity and debt has dried up for many small to mid-cap mining companies. Those with portfolios that are at the development stage or that are not sufficiently revenue generating will have to sell assets to survive. The spate of impairment announcements and write downs will intensify and, across all tiers of the industry, we are likely to see considerable sector reshaping as stronger companies seize opportunities to acquire assets at low prices.”