Mining Industry Offers Rich Vein for Mergers
Platt, Gordon, Global Finance
More mergers in the mining industry are likely in 2008, analysts say, including potentially some of the biggest M&A deals ever.
Australia-based mining company BHP Billiton in November announced plans to launch an unsolicited tender offer to merge with UK-based Rio Tinto in a stock-swap transaction for which Thomson Financial gave a rank value of $192.75 billion. The proposed merger between the world's number-one and number-three mining groups came as Rio Tinto itself was wrapping up its acquisition of Canada-based Alcan in a deal valued at $38.1 billion that would create the world's largest aluminum producer.
There were more deals in the metals and mining sector in 2007 than ever before, as metals prices soared on rising demand from China and other emerging market countries. Standard & Poor's Ratings Services says it expects BHP Billiton's bid for Rio Tinto to spur further consolidation in the industry. The rating agency warns that mergers could trigger potential downgrades if they are financed with large amounts of debt.
At least three more transactions totaling more than $50 billion are likely by June, Ernst & Young's partner in charge of global mining and metals, Michael Lynch-Bell, told a conference in London in November. It is easier for mining companies to acquire new reserves through acquisitions than via exploration and production in ever-more-remote areas of the world.
"Smaller companies that are still exploring or developing mining projects are finding it much more difficult than usual to get access to finance," Lynch-Bell says. The trend for major producers to acquire smaller mining companies is likely to continue, he predicts.
"It is very rare for a small mining or exploration company to go from obtaining an exploration license all the way through to production," Lynch-Bell says. …