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Merger mania and the money they paid Posted: Wed, 27 Dec 2006 [miningmx.com] -- ONE thing is for certain, there was a lot of cash flying around in the world’s mining sector in 2006. According to Bloomberg News, about $186bn in 1,361 mining deals had been transacted by the year-end. Billions of dollars was also returned to shareholders, or spent in buy-backs. Revenue was sky-high. The industry had never had it so good for years. The poster deals were Xstrata’s successful $17bn bid for Falconbridge, and CVRD’s $17.4bn offer for Inco. But there were many expensive transactions that didn’t make it, mostly because shareholders kiboshed them. Take, for instance, the failed tryptich involving Inco’s $22.5bn bid for Falconbridge backed by Phelps Dodge. Having seen Xstrata nip in for Falconbridge, Inco then became lunch, falling to CVRD. Phelps Dodge was next in line becoming subject to a $25.9bn bid from Freeport McMoRan that is still in process. In the gold industry, there was the $8.7bn Goldcorp paid for Glamis Gold in Canada. It seemed a high price to pay for a company that had targeted production of 600,000 oz in 2006. But such is the interest in funding growth in an industry short of new gold reserves. And in some cases, the large cash deals were just about paying heavily in order to stand still. The Goldcorp bid for Glamis was the gold industry’s second largest in value following Barrick’s bid for Placer Dome, another Canadian gold producer, for $10.4bn. With targeted output of 8.6 million oz in 2006, there’s no knowing how Barrick will find these new ounces to replace production this year alone. Potential takeover targets seem to know this about Barrick and they expect the North Americans to pay handsomely, as in the case of Novagold whose shareholders rebuffed Barrick’s improved $1.71bn bid on November 7. Conspicuous by their near absence from the merger and acquisition frenzy were the South Africans. A much touted bid for Anglo American never happened. It still might, but that’s a story for 2007. AngloGold Ashanti remains vulnerable and with Polyus Gold claiming in the Financial Times recently it was seeking scale – possibly to become one of the big three gold producers – there’s a case to be made for its potential takeover next year. Remember, about 40% of AngloGold Ashanti will be made available by former parent company, Anglo American in time as it seeks to disinvest from the gold market. Gold Fields flew the flag for South Africa in merger and acquisition activity. It successfully bid for Barrick’s stake in the troubled but potentially wealthy 28 million oz South Deep project. This included a bid for JSE-listed Western Areas, which it 83% owns at the time of writing. In total, Gold Fields shelled out for $2.5bn in cash and shares. On a smaller scale, it bought Bolivar Gold in January for $360m. There wasn’t much interest in Africa-based companies. Of the 1,300-odd mining related transactions in 2005, only 97 were in Africa totalling a mere $13bn. At least Africa ranks as the third most popular destination or exploration spend. According to Metals Economics Group (MEG), exploration spend in 2006 eclipsed the previous record expenditure of $5.2bn in 1997 acknowledging a new watermark had been reached by the world’s mining industry. Exploration is expected to be $7.2bn in 2007, MEG has said. The rush of transaction activity has been viewed with some dismay, however. Speaking to Miningmx in September, Steve Shepherd, an analyst for JP Morgan in Johannesburg, said exogenous pressure on mining executives – mostly from corporate bankers – was partly to blame. “The core competence of mining executives is finding ore bodies and building mines. Putting pressure on them to buy assets changes what they do. Is that a good thing?,” he asked. One of the problems of excessive deal-flow was negative effects on management which deteriorates the larger the company becomes. “They just spread themselves too thin,” said Shepherd. Mark Bristow, CEO of Randgold Resources, fights shy of the merger mania. Having presided over a company that has grown its market capitalisation to $1.6bn from $327m, without ever delving into corporate activity, shows shareholders that patience and organic growth might be a better bet than buying bid. “I thought immediate gratification was just a male thing,” said Harmony Gold’s CEO, Bernard Swanepoel, when asked by Miningmx to comment on the trend. And if further proof was needed of the excess of cash flowing through the mining industry, consider the scale of the share buy-backs and special dividends to shareholders.Free news alerts: click here to
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