Mergers to increase in 2010

Brendan Ryan | Thu, 04 Feb 2010 11:17
[miningmx.com] -- MERGER and acquisition (M&A) activity will increase in the mining sector this year and a feature will be the growing participation of state-owned companies.

Addressing the Mining Indaba Conference being held in Cape Town on Thursday Magnus Ericsson - chairman of the Raw Materials Group – said both China and the European Union were becoming concerned about the security of future supplies of strategic minerals.

Reason was the concentration of supply of certain metals in the hands of, typically, three dominant private sector companies mining those metals.

His comments come against a background where the South African government is keen to set up a state-owned mining company holding stakes in “strategically important” private sector coal and uranium mining companies.

Ericsson singled out iron ore where he pointed out three mining companies accounted for 75% of the total world seaborne export trade in iron ore.

“That situation provides a high possibility of influencing price,” he commented.

Ericsson added that the three companies may in fact just be two. He did not name them but that was a clear reference to the JV between Rio Tinto and BHP Billiton over the operations of their iron ore mines in Western Australia.

The other major supplier of iron ore to the export markets is Brazilian resource giant Vale.

He commented, “It’s clear state company involvement is going to increase but the influence of that on the market is not clear at this stage.”

Ericsson defended the growing involvement of China in Africa and Australia.

He described a earlier presentation to the conference by Enterra Solutions MD Thomas Barnett on growing Chinese influence in Africa as, “a simplified picture from a United States perspective. I don’t agree with Barnett’s scenario of China taking over the world.”

Ericsson said the Chinese approach to investment in Africa was long-term and beneficial to the host countries.

He commented, “when you look at Chinese involvement in Africa you find they have gone into countries where other major mining companies are not that interested because of the political problems involved or the lack of good infrastructure.

“I think the Chinese approach is good for the African countries. The need to return to a longer-term perspective is a positive aspect of China’s attempts to secure their supplies.

“We also think Beijing is becoming more observant over how Chinese companies operating abroad behave themselves. We see that the Chinese will adhere to the regulations and codes in countries that have good regulatory systems.

“If good regulatory systems are not in place then the Chinese will not stick to the rules.”

Ericsson was critical of the Australian government’s attitude to China’s attempts to invest in that country’s mining sector.

“I cannot make the ends meet in a situation where Australia’s junior mining companies want to roam the world to get access to resources but, at the same time, the Australian government maintains it must watch carefully foreign investment coming into Australia.”

Ericsson said the total value of mining M&A deals done had dropped from US$140bn in 2006 to $40bn in 2009 but the level of Chinese involvement in those deals had risen from zero to 32% over the same time frame.

He added Indian involvement in mining M&A had risen from zero to 5% over this period pointing out that state involvement in mining is particularly high in the BRIC (Brazil, Russia, India and China) countries.

Only some 10% of the mining industries of China and India are owned privately.

Ericsson said concerns over future metal supplies were growing in the European Union and he believed regulatory changes were imminent which would make it easier for mining companies to operate there.

He said one of these changes was likely to be the opening up of exploration access to large areas of ground currently ruled out of bounds for environmental reasons.

Ericsson said M&A activity was closely linked to metal price levels and the current rising trend in metal prices meant an increase in M&A activity seemed inevitable.

“Logically, companies should be making acquisitions when metal prices are low but the problem is that they often don’t have the necessary funds at that stage.

“The current situation also favours the Chinese who have plenty of cash at a time when many mining groups are still trying to deal with the existing debt on their balance sheets.”