EY MA and Capital Raising 2013 Trends 2014 Outlook Changing Gear

Mergers, acquisitions and capital
raising in mining and metals

2013 trends
2014 outlook
Changing gear
About this study
The data is primarily sourced from ThomsonONE.com.
Unless otherwise stated, all values are in US dollars.
Mergers and acquisitions (M&A)
Only completed deals are included. Deals identied as
incomplete, pending, partly incomplete, conditional or intended
as of 31 December 2013 were excluded.
The acquirer country is based on the ultimate owners geographic
headquarters. The target country is determined by where the
primary targeted asset or company is located.
Country-based refers to domestic and inbound deals.
A countrys acquisition refers to domestic and outbound deals.
Commodity analysis is based on the companys primary
commodity focus.
The value of M&A activity by commodity includes deals where
the given commodity is the acquirer and/or targets 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.
Megadeals refer to all deals with a value equal to, or greater
than, $1b.
Capital raising
The primary source for this data is ThomsonONE. Certain details
have been supplemented with information from company and
stock exchange websites and major business press. Only completed
transactions are included.
Only original Initial Public Offerings (IPOs) the rst time that
a company issues equity to the public are included in the
IPO analysis. Proceeds are allocated to the primary exchange
of listing.
Equity issues are geographically categorized by the primary
exchange where the issuers stock trades, except where stated.
Where a company offers Global Depositary Receipts or American
Depositary Receipts, the issue is allocated to the destination
market of those shares.
Loan data and proceeds include renancing and amendments to
existing debt, and are as per ThomsonONE intelligence. Proceeds
are allocated to the geography of the borrower.
All credit rating references are to Standard & Poors long-term
issuer ratings, unless otherwise stated.
Notes on the data:
Note: The data is primarily sourced from ThomsonONE, $ refers to US dollars.
This EY study examines transactions and
nancing in the mining and metals sector in
2013, and discusses the outlook for 2014.
It provides an in-depth analysis of the major
global mining and metals transactions,
capital markets and resulting capital ows, by
considering mergers and acquisitions (M&A),
initial public offerings (IPOs), secondary equity
offerings, bonds and loans. It also provides an
analytical breakdown by commodity.
Mergers, acquisitions and capital
raising in mining and metals
2013 trends, 2014 outlook
This report was authored by:
And thank you to the EY Global Mining & Metals team for their support.
Lee Downham
Global Mining & Metals
Transactions Leader
Tel: +44 20 7951 2178
ldownham@uk.ey.com
Robert Stall
Americas Mining & Metals
Transactions Leader
Tel: +1 404 817 5474
robert.stall@ey.com
Jodie Eldridge
M&A Analyst,
Mining & Metals
Tel +61 2 9248 4423
jodie.eldridge@au.ey.com
Mike Elliott
Global Mining & Metals Leader
Tel: +61 2 9248 4588
michael.elliott@au.ey.com
Kunihiko Taniyama
Japan Mining & Metals
Transactions Leader
Tel: +81 3 4582 6470
kunihiko.taniyama@jp.ey.com
Nicky Crabtree
Assistant Director,
Mining & Metals
Transactions Advisory
Services
Tel: +44 20 7951 5237
ncrabtree@uk.ey.com
Emily Colborne
Strategic Analyst,
Mining & Metals
Tel: +44 121 5352086
ecolborne@uk.ey.com
Celeste van der Walt
Senior Researcher,
Mining & Metals
Tel +27 11 772 3219
celeste.vanderwalt@za.ey.com
Paul Murphy
Asia-Pacic Mining & Metals
Transactions Leader
Tel: +61 3 9288 8708
paul.murphy@au.ey.com
Contents
Themes
Executive summary 6
Spotlight: Alternative nancing 10
Q&A with Silver Wheaton Corp. 14
Spotlight: The window of opportunity 18
Mergers & acquisitions 22
Capital raising 32
Outlook 40
Commodity analysis
Aluminium 44
Coal 46
Copper 48
Gold 50
Iron ore 52
Nickel 54
Potash/phosphate 56
Silver/lead/zinc 58
Steel 60
Uranium 62
6 | Mergers, acquisitions and capital raising in mining and metals
2013: A year of calibration and
repositioning
We look back at 2013 as an inection point, a year when
management and investors nally came to terms with a new
investing paradigm.
The extreme price volatility and rapid changes to the global
economy that dened 2012 persisted through 2013.
Year-end reporting announcements were littered with headlines
of impairments and recriminations that forced changes in strategy
and senior management across many of the industrys participants
during 2013.
As a result, we saw investing activity contract during 2013,
where the risks were just too great given the moving base on
which decisions needed to be made. Acquisition plans were not
supportable and as a result, few deals were pursued. As the year
progressed, even divestment plans were scaled back as it became
clear that price expectations could not be met, and as balance
sheets became less stressed due to renancing and stronger cash
generation in the second half of the year.
2013 marks the tipping point for the sector, with many investors
calling it the bottom of the market. This investment inertia
is clear in the underlying deal volumes and values for the year,
which, excluding the all-share merger of Xstrata and Glencore
International, were down 25% and 16% year-on-year (y-o-y) to 702
and $87.3b, respectively.
Capital raising followed a similar trend, with only a 9% increase
in total proceeds to $272b, largely due to some exceptional loan
renancings, and a 9% decrease in the total volume of issues to the
lowest level seen since 2008. There were few new investments in
the sector and the bulk of capital raised during 2013 is being used
to renance existing facilities.
This pull-back in risk capital hit the junior sector hardest, with
equity markets providing little support. Proceeds from secondary
issues by juniors fell 43% y-o-y (from an already low base) with an
inevitable tightening of global exploration spend. Investors are
looking for low risk, near-term, high-yield opportunities, which the
early-stage junior mining sector cannot offer at present. To
bridge this gap, alternative capital raising options provided some
reprieve but did not satisfy the level of capital being demanded
across the sector.
However, the continued rise of private capital in the sector,
including the increased share of total M&A undertaken by nancial
investors (by value) from 5% in 2012 to 19% in 2013, supports the
view that 2013 marks the tipping point for the sector, with many of
the providers of such capital calling the bottom of the market.
Executive
summary
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*
Volume 475 596 564 701 903 919 1,047 1,123 1,008 941 702
Value ($m) 46,182 26,350 65,430 175,713 210,848 126,884 60,035 113,706 162,439 104,014 87,309
Average value ($m) 97 44 116 251 233 138 57 101 161 111 124
Median value ($m) 4.4 3.1 4.8 6.2 7.2 6.0 3.2 5.2 5.6 5.0 3.8
Volume and value of deals (2003-2013)
*Excluding the merger between Glencore International and Xstrata (the Glencore Xstrata merger)
Mergers, acquisitions and capital raising in mining and metals |
Deal inertia drives M&A activity down
2013 marked the third consecutive year of declining M&A activity
in the mining and metals sector: deal volume dropped 25% y-o-y.
While the value of deals increased by 20% to $124.7b, this increase
was primarily due to the completion of the Glencore Xstrata merger.
Excluding this deal, value decreased 16% to $87.3b, highlighting
the contraction in investment spend across the sector during 2013.
Although there were notable exceptions, such as First Quantum
Minerals acquisition of Inmet Mining, the majority of deals that
completed in 2013 were largely smaller, low-risk acquisitions
fueled by a desire to increase an existing stake, achieve domestic
or inter-regional consolidation, or a strategic attempt to secure
future supply.
As diversied mining companies seek to optimize portfolios, many
of the industrys large producers announced signicant divestment
progams. During 2013, the industrys top ve diversied mining
majors completed $6.3b
1
of divestments, while $5.5b of deals have
been agreed and are expected to complete during 2014, with the
Las Bambas divestment by Glencore Xstrata being the last major
1. This includes the $1.8b sale of Vales Norsk Hydro shares, which falls outside of the M&A data
within this report.
7
divestment still in the process of nding a buyer. This activity,
together with other rationalization measures and an upturn in
iron ore prices toward the end of 2013, has taken the pressure off
earnings and balance sheets, easing the pressure to divest.
Although the successful exit of many divested assets suggests
deals are there to be done, there is strong evidence that a gap
remained between the valuation expectations of buyers and sellers
during 2013. Intensied volatility in metals prices continues
to drive a disparity in asset valuation expectations and, as a
consequence, buyer and seller differing views on price remain a
drag on M&A activity.
The opportunity for nancial investors
continues
The year in review proved to be of great opportunity for nancial
investors who increased their share of total M&A value from 5% in
2012 to 19% in 2013. These investors can act counter-cyclically,
attracted by the prospect of potentially strong returns driven by low
asset valuations.
2013 was a year of calibration and
repositioning. Those mining companies who
had a change of leadership refreshed their
strategies and focused on productivity and
capital optimization rather than pursuing
M&A. Across the sector we saw the capital
raising environment tighten for those
without an investment grade credit but,
looking forward, we expect to see a steady
improvement in market conditions.
Lee Downham
Mining & Metals Global Transaction Advisory Services Partner
UKI
Capital raising by asset class - proceeds $b (2007-2013)
2007 2008 2009 2010 2011 2012 2013 Change
IPOs 21,400 12,406 2,987 17,948 17,449 1,388 815 -41%
Follow ons 66,802 48,751 73,806 49,705 49,745 25,950 26,233 1%
Convertibles 12,865 12,238 14,431 5,477 2,365 3,537 7,738 119%
Bonds 36,358 38,146 61,016 72,502 83,804 112,539 87,890 -22%
Loans 110,787 171,691 62,420 183,875 187,059 105,981 148,881 40%
Total 248,212 283,232 214,660 329,507 340,422 249,394 271,557 9%
Financial investors (including sovereign wealth funds) undertook
ve of the 19 megadeals (>$1b) in 2013: Lizarazus and Recezas
joint $3.6b investment in Polyus Gold International; investments in
Uralkali by Onexim Group ($3.5b) and Chengdong Investment Corp
($2b); Samruk-Kazynas $1.7b investment in Kazzinc; and Crispian
Investments $1.5b investment in Norilsk Nickel.
Other smaller deals of this nature included B&A Minerao,
a venture headed by the former CEO of Vale Roger Agnelli,
and Grupo BTG Pactuals joint purchase of Rio Verde Minerals
Development Corp for $36m. In addition, Mick Davis (Former
Xstrata CEO) announced his intention to establish X2 Resources,
while Aaron Regent (former CEO of Barrick Gold Corp) formed
investment company Magris Resources, demonstrating the growing
relevance of mining-focused private capital.
So, while 2013 will be known as the year in which this capital was
raised, the inection we now see in the market is likely to mean that
2014 is the year when we start to see this capital being deployed.
Debt renancing driving an improvement
in balance sheet strength
Although bank lending increased 40% y-o-y to $149b, this headline
includes a large renancing of $17.3b by Glencore Xstrata
reportedly the largest corporate loan renancing in any sector in
Europe for over ve years.
About half of the total loan proceeds were amendments, increases
and extensions to existing credit agreements, with only $33b
of lending coming in the form of new agreements for project
nancing, acquisitions and capital expenditure.
A total of $74b of the renancing completed in the year was largely
renancing on improved terms, which pushed out maturities and
lowered yields to strengthen balance sheets. Average spreads on
non-leveraged loans narrowed to 147bps in 2013 from 174bps
in 2012. Intense competition among banks to secure relationships
with industry heavy-weights meant that investment grade
borrowers attracted greater exibility and, in some cases, better
pricing, than corporate bonds could offer.
Syndicated project nance that closed in 2013 reached $13.4b,
up from $5b in 2012. The largest nancings went to steel and
aluminium projects in India and the Middle East, respectively. A
small number of iron ore, gold and base metals mines in Africa,
South America and Australia also attracted project nance on a
smaller scale. Although this increase is well below 2011 levels, it is
a move in the right direction. This positive indicator, coupled with
greater competition from banks to fund the industrys advanced
and de-risked projects, supports a stronger appetite for lending
going into 2014.
Convertible loans providing a rare source
of capital for exploration and development
companies
Convertible bond raisings experienced a 32% increase in volume
and a massive 119% increase in proceeds, albeit from a low
base in 2012.
Share of deal value by acquirer type (2011-2013)
Industry acquirers
State-backed acquirers
Other sectors
Financial investors
Commodity traders
Undisclosed
0% 20% 40% 60% 80% 100%
2011
2012
2013*
*Excluding the Glencore Xstrata merger
-
2
4
6
8
10
12
14
16
-
20
40
60
80
100
120
140
160
Proceeds Number
P
r
o
c
e
e
d
s

(
$
b
)
N
u
m
b
e
r
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Convertibles became increasingly popular in 2013 as investors
could secure coupon rates comparable with those of vanilla
high-yield bonds, thereby effectively receiving free options as an
inducement. This bucked the historical trend of issuers paying
lower coupons to compensate for the potential equity dilution.
The average coupon paid in 2013 was 9%, with one issue offering
22.5%. This partly reects the high proportion of early-stage,
9 Mergers, acquisitions and capital raising in mining and metals |
unrated and therefore higher risk companies that are issuing
convertibles, and in some cases are prepared to accept the highly
dilutive equity valuations in the absence of many alternatives. As
a result, any lack of condence in the upside potential of the share
price is compensated for by the high yield that investors receive for
the debt component.
Outlook - long term health in the balance
The mining and metals sector is entering 2014 with a more
positive outlook: condence in the global economy is improving,
companies have taken action to deleverage balance sheets and the
industry-wide focus on productivity and efciency should begin to
yield results. As a result, we expect the gradual strengthening of
mining and metals equity valuations to continue and the increased
availability of capital.
However, continued economic volatility is also expected in 2014
due to Eurozone economics, Chinese economic rebalancing and
US Federal Reserve policies regarding the tapering of quantitative
easing. As supply and demand struggle to return to post-supercycle
equilibrium, we expect further price volatility to occur for at least
the next two years. This will see caution prevail: any uplift in M&A
activity and improvement of capital raising conditions will be
gradual and will require innovation in pricing to tame volatility.
Conditions in the bond markets are likely to tighten if global interest
rates begin to rise should quantitative easing begin to taper. We
expect to see a greater proportion of the sectors funding to come
from equity through follow-on raisings, although a widespread
return to equity will require a return of condence at the top of the
industry along with some high prole success stories among junior
developers. If this occurs, it should translate into optimism and risk-
taking at the bottom, said Lee Downham, Mining and Metals Global
Transaction Advisory Services Partner, UKI.
Similarly, we are seeing strong appetite from debt providers,
with increased competition among banks likely to improve access
to leveraged loans for quality mid-tier mining companies and
developers. However, given the strict criteria applied by these
investors, it is questionable if the availability of these funds will
support industry needs in their entirety.
We expect growth in M&A activity during the rst half of the year
to be driven by nancial investors and equity-backed alternative
capital providers as outlined in our Spotlight section: Alternative
nancing. This growth will not only be driven by anticipated longer
term commodity price recovery but also by the application of
in-house technical experience to drive operational, technical and
The Capital Agenda
Based around four dimensions, the capital agenda helps
mining and metals companies consider their issues and
challenges and understand their options to make more
informed capital decisions.
1. Preserving capital: reshaping the operational and
capital base
2. Optimizing capital: driving cash and working capital and
managing the portfolio of assets
3. Raising capital: assessing future capital requirements and
assessing funding sources
4. Investing capital: strengthening investment appraisal and
transaction execution
How organizations manage their capital agenda today will dene
their competitive position tomorrow.
EY works with clients to help them make better and more
informed decisions about managing capital and transactions
strategically in a changing world. Whether you are preserving,
optimizing, raising or investing capital, EYs Transaction
Advisory Services brings together a unique combination of skills,
insight and experience to deliver tailored advice attuned to your
needs helping you drive competitive advantage and increased
shareholder returns.
nancial inuence. This has the potential to be the most exciting
story of 2014. Will we see the deployment of capital so feverishly
raised during 2013? And, if so, will it begin to drive new investment
activity across producers?
With low levels of new capital and new investment, the mining
sector may well be sowing the seeds for the next boom as supply
falls short of demand. Will nancial investors, private capital and
other counter-cyclical investors be able to ll this capital shortfall
in 2014? It is EYs view that a more patient form of capital
creation is essential for the sectors long-term health. This capital
will be required to both replace the hot money that has been
leaving the sector, as short-term returns fall from their record
level, and provide capital for the next projects required to restore
extinguishing supply or meet future demand growth.
Alternative nancing
The majors found little difculty in securing funding through traditional means (primarily the debt
markets) in 2013. But with equity markets increasingly taking a short-term view, juniors are necessarily
looking for alternatives.
Spotlight
Lack of condence in the industrys ability to yield satisfactory near-
term returns has resulted in a dramatic pull back in public equity
funding to the sector. Further, efforts by the majors to restore that
condence, including through a focus on optimizing existing assets,
have resulted in a slowdown of buying or investing on their part,
particularly in long-lead exploration.
With much of the industry focused on optimization, it should
be of little surprise that funding sources designed to achieve
just that have seen an increase in demand. Streaming and
royalty agreements aim to unlock incremental value through the
monetization of non-core metals production; hence we are seeing
the streaming model evolve and grow in tune with the current
needs of the industry.
Further, a lack of clear consensus over the near-term direction of
commodity prices and more importantly, whether the bottom
of the latest cycle has been reached continues to inhibit the
wholesale return of both public equity and industry-led M&A. But
equally, this impasse has created exceptional opportunities for
capital providers with condence, patience and nancial capacity
to take a long-term view on the sector, whether from an investment
returns or supply security perspective.
Known brands, new vehicles
In the private sphere, where arguably greater freedom exists to
take such a view, veteran industry expertise is combining with
private equity to inject capital into the sector through strategic
acquisitions. Some examples include:
X2 Resources, led by ex-Xstrata CEO Mick Davis and backed by
TPG and Noble Group
B&A Minerao, the venture of Roger Agnelli (ex CEO of Vale)
and BTG Pactual
QKR Corporation, the fund headed by ex-JP Morgan Chase
banker Lloyd Pengilly, with Andre Liebenberg (former
BHP Billiton), and backed by a consortium of investors
including Qatar Holdings
Magris Resouces, the fund set up by Aaron Regent (ex CEO of
Barrick Gold Corp)
In addition, Resource Capital Funds, a mining-focused private equity
(PE) rm, has $2.04b of committed capital in its latest fund to
invest in the mining sector. This represents an estimated $4.6b of
capital deployed or waiting to be deployed - by this group alone.
The traditional private equity model has historically played a
relatively small role in the upstream mining sector, but depressed
valuations have increased speculation that this trend may change.
However, while there may be discrete deals of this nature, with
traditional PE looking at specic deals, our view is that private
capital funds, of the type described above, are the ones that
will be most active in the sector. These investors are deploying
patient capital, adopting a longer-term investment horizon and
seeking to establish a robust operational structure that supports
margin-led growth, rather than pursuing the strategy of growth
for growths sake which characterized industry growth over the
previous decade. For mainstream PE, it is about backing the right
management and funding an asset with short-term exit potential;
those types of opportunities are few and far between. Strategic
offtakers, such as state-backed entities and commodity traders,
typically have greater private visibility over their particular near-
and long-term demand picture through their customer base. This
gives them the condence to invest now to secure future supply.
Exploration in crisis
Early-stage exploration companies have historically relied on public
equity markets for funding. However, challenging market conditions
mean that few institutional investors are prepared to take a risk
on early stage investment and few companies are keen to issue
further shares at such low valuations. As a result, explorers are
left with few options: cancel exploration programs to preserve
precious cash resources; or seek last resort nancing options
that typically delay the dilution impact but of course come at a cost.
Consequently, there has been both a dramatic decline in exploration
expenditure over 2013,
2
and an increase in the pursuit of equity-
linked nancing options, such as standby-equity agreements and
convertible instruments. Risk capital is unlikely to be available on a
large scale in 2014, but there is an increasingly large pool of family
ofces, private equity providers and venture capitalists that provide
early-stage seed funding, often linked to certain conditions and
achievement of project milestones. However, access to this group of
investors can be challenging, given the private and highly selective
nature of their investments.
2. SNL Metals Economics Groups 24th Corporate Exploration Strategies estimates worldwide
exploration budgets to fall 29% to $15.2b in 2013, SNL Metals Economics Group press
release, 24 October 2013.
Alternative nance, while not a new phenomenon, has increasingly become mainstream
in 2013. Unsupportive, short-termist equity markets have spawned a greater variety
of funding structures and capital providers at a time of critical need among the industrys
advancing juniors.
Michael Elliott
Australia
Evolving landscape
Different nancing options are suited to particular stages of the
development cycle and critically to the individual needs of the
asset, each with their own risks and costs attached. Companies
today typically require non-dilutive, committed, exible,
value-accretive funding options where investor objectives are
aligned with the long-term goals of management. Portfolio funding
approaches are often adopted by advancing companies as a means
of managing risks and costs.
Importantly, funding options are becoming increasingly exible
and innovative in their structure, evolving to meet the changing
demands of the industry. Streaming agreements form such an
example: Vales landmark $1.9b agreement with Silver Wheaton
Corp marked a step change in the scale and scope of streaming
deals.
3
For insights into Silver Wheaton Corps investment strategy,
refer to the Q&A with Randy Smallwood, President & Chief
Executive Ofcer, and Gary Brown, Senior Vice President & Chief
Financial Ofcer, Silver Wheaton Corp.
Streaming represents a non-dilutive, non-controlling means of
securing upfront capital and unlocking value, typically from non-
core production. However, no form of nancing is without its costs
and limitations. Streaming agreements limit the project owners
future exposure to the streamed metal, and potentially impact a
projects margins once in production, through the loss of by-product
credits. Further, Standard & Poors (S&P) has recently announced its
decision to treat streaming agreements as debt (under prescribed
circumstances), which may deter leveraged producers from
undertaking streams. Other rating agencies, including Moodys,
have not followed suit, so the extent to which this move by S&P will
inhibit the growth of streaming in 2014 remains to be seen.
The focus of stream providers remains typically on producing and
near-producing assets that present low political risk, and sufcient
operating margins and earnings stability to deliver throughout
cycles. However, earlier stage options, such as the early deposit
structure agreed upon by Silver Wheaton and Sandspring
Resources in November 2013,
4
are also emerging.
3. Silver Wheaton acquires gold streams from Vales Salobo and Sudbury Mines, Silver Wheaton
Corp press release, 2 May 2013.
4. Silver Wheaton completes early deposit gold stream agreement with Sandspring Resources,
Silver Wheaton press release, 11 November 2013.
Streams have arguably been the story of 2013, although their
contribution to the overall sector funding remains small: we
estimate that about $2.4b of upfront capital was injected into
the sector via streams in 2013. However, this is not to downplay
its importance. While relatively small compared with traditional
bank lending, project nance and equity, streaming as a form of
alternative nance has become signicant, dwarng the level
of investment into the sector from standby equity distribution
agreements (SEDAs) or royalties, for example.
Future of alternative nancing
Just as many of the structures described above have been
around for a long time, so they are likely to remain an important
component of mining industry funding, going forward. The return
of equity markets for early exploration should limit the need for
higher cost alternatives, but we believe this may be some way off.
If we are adapting to a new normal of steadier demand growth
and increasing supply complexities, there will be an ongoing need
for countercyclical, long-term investment approaches that sustain
industry growth through inevitable periods of volatility.
Demand is only one side of the equation; supportive conditions
would need to persist for nance providers to be able to secure and
provide capital on attractive terms. Circumstances in 2013 have
given rise to an environment of low condence among the many
and high condence among the few translating into the potential
for opportunistic buying at depressed valuations.
We expect these circumstances to persist through 2014: the
window of opportunity for private capital investment is clearly now
and capital is ready and waiting to be deployed, albeit only to the
best projects and teams. There are signals that juniors are adapting
and responding to the changing funding environment - from better
management of expectations, scaling back of project plans, and
careful cost management, to better storytelling. As a result, in
2014, we expect to see continued strong growth in alternative
nancing to the industry.
Note: Stages refer to exploration, development, construction, production.
Alternative nancing options utilized in 2013
Type Typical structure Benefits/drawbacks to company Example providers
Stage
E D C P
Standby equity
agreements
Deferred equity and equity-backed loans.
Option to issue shares to the provider over a
multi-year period, at the issuers discretion.
Issuer is in control of timing
Delayed dilution can adversely impact
liquidity and share price
YA Global
Darwin Strategic
Dutchess Opportunity Cayman Fund
Earn-in
agreements
Partner (often a major) funds exploration
activities over a specified time period,
thereby earning the right to a pre-
determined share of project ownership.
Ability to progress exploration projects
Potential exit option
Exit risk earn-in partner can elect not
to continue
Potential dilution
Development
finance
Loans, strategic equity and convertibles.
Banks may offer ancillary services (e.g.,
community engagement strategies,
environment and social risk management).
Strong vote of confidence in the project
and management
Stringent environmental and social
requirements; extensive diligence
required
International Finance Corporation
China Development Bank
European Bank for Reconstruction
and Development
International Development Corp of
South Africa
Offtake Terms vary but typically include exclusive
right to percentage of future production.
Can, but may not, include advance payment.
Can be structured as take-or-pay.
Guaranteed source of demand
Often a requirement for project finance
Can include minimum stipulations e.g.,
minimum price and volume, hedging
Strategic state buyers
Private capital e.g., Red Kite, Blackrock
Banks
Customers
Traders
Equipment/EPCM Equipment leasing agreements and project
investment by equipment/service providers.
Typically include operating leases, sale and
lease-back, hire purchase, secured term
loans, RCFs, asset-based inventory financing
and equity investments.
Can reduce capital outlays at
construction phase
Supply chain default risk - financial and
legal due diligence required
Equipment suppliers or EPCM
contractors e.g.,
GE Capital
Macquarie Bank
Caterpillar Financial Services
Standard Bank
Royalties Upfront payment in return for a percentage
of either future revenues or profits, or the
value of the product produced
Long-term, passive investments
no dilution
No interest costs
Payments must be made regardless of
future profitability
Reduces future cash flows
Royal Gold
Franco-Nevada
Premier Royalty
Anglo Pacific Group
Callinan Royalties
American Bullion Royalties
Royalco Resources
Gold Royalties Corp
Streams Upfront payment plus ongoing payments
in return for a right to a percentage of
production from an identified asset (usually
life-of-mine). Typically precious metals
by-product.
No equity dilution or interest costs
Retain operational control
Monetization of non-core production
Ongoing payments designed to cover cost
of production
S&P treats as debt (from
November 2013)
Terms need to be carefully negotiated
Loss of by-product credits
Silver Wheaton
Franco-Nevada
Royal Gold
Sandstorm Gold
Sandstorm Metals + Energy
Alternative nancing options
The table below outlines some of the options that are being adopted
by mining and metals companies in the current environment. These
options are explored in more detail in EYs contributions to Mining
Journals Global Mining Finance Guide 2014.
Q&A
President & Chief Executive Ofcer
Randy Smallwood
Senior Vice President & Chief Financial Ofcer
Gary Brown
Interview
With major producers under pressure from shareholders to pull
back capital investment, combined with slow equity markets for
developers, timing seems perfect for patient, counter cyclical
investors such as Silver Wheaton. Do you agree, and how
long do you see this window of opportunity being open for
investors like Silver Wheaton?
I think weve proven that this model works across the cycle. The
current state of the industry in terms of reduced capital spending,
lack of equity support and a challenging debt environment has
made this market about as good as it can be for us and created all
sorts of investment opportunities for us.
We always compete as a source of capital against debt and equity
and in most markets we provide an attractive form of capital with
one of the key characteristics being the unlocking of hidden value.
The feeling we get is that we are close to the bottom. We see fourth
quartile producers hurting, and marginal projects cancelled or put
on hold. In the precious metals space, we really feel that commodity
prices cannot go down much further because its driving supply
side pressure, so its only a matter of time before it starts moving
up again.
On the demand side of the equation, there is a continued appetite
for metals out there, which will apply upward pressure on
commodity prices, so I am hopeful that by the end of this year we
will start seeing a move back up off the low price environment that
we are in right now.
I have been in the industry for close to 30 years now and its
amazing how many times the experts can be wrong with respect to
predicting commodity prices. You have to rely on your intuition to a
certain extent, but more importantly, you need to focus on making
good long term investments that are able to withstand the short
term uctuations in commodity prices. Randy Smallwood
Given the desire among many investors in major producers to
reduce invested capital, do you see a greater opportunity for
Silver Wheaton to come into some of these large assets through
a streaming arrangement?
I think that we have already touched upon the point that
equity investors have denitely pulled back from this space, so
the availability of capital from equity investors has denitely
been reduced over the last 12 months. That in itself creates an
opportunity for competing forms of capital like metal streaming.
On the debt side, the companies that can attract debt are generally
trying to reduce the nancial risk in their capital structures and that
combination does create a more favorable environmental for metal
streaming.
with Silver Wheaton Corp.
the operating margins of the asset. We want mines that will
deliver product to us through both the highs and the lows of
the commodity price cycles. We have been in the industry long
enough to know that commodity prices are cyclical and so the
rst criteria that we look at is where the mining operation is
expected to fall relative to the respective cost curve for the
primary metal being mined. We are very focused on making
investments in operations that lie in the bottom half of their
respective cost curves.
To expand on that a little bit, if it is a copper mine that has silver
or gold by-product production, we look at the copper cost curve
and determine where this asset ts relative to all the other
copper mines in the world, and well be interested in the assets
at the bottom half of the cost curve because those are the ones
that will continue to operate and deliver through highs and more
importantly through the lows of the commodity price cycle.
Its the fourth quartile and some third quartile producers that
suffer and sometimes have to shut down during the lows of the
commodity prices.
When we look at our existing portfolio, about 90% of our
production comes from assets in the bottom half in the
respective cost curves. With a portfolio that is comprised of
24 different assets, 19 in operation and 5 at various stages of
development, to have that high a concentration in the bottom
half of the cost curve, we would argue, it is one of the highest
quality portfolios in the mining industry. Randy Smallwood
And what about management, how important are good
management teams to your investment decision?
We are very focused on making sure that we invest into good
partners, but one of the things we always have be sensitive to,
is the fact that we do not select the management. So although
these mines may have expert management right now, we do not
know who is going to be operating these mines ve years from
now. We do not have that control. Management is very important
to us, and we work with strong partners but we also want assets
that are able to withstand weak management and changes in
management.
And so, again, thats one of the objectives of being down on
the bottom half of the cost curve, it gives it some capacity
to withstand whatever gets thrown at these assets including
political risks, tax changes, low commodity prices and poor
management - we want to make sure that they are strong
enough to withstand the impact of all of those.
Randy Smallwood
While there have been capital spending cuts, a lower commodity
price environment results in less operating cash ow being
generated by mining companies to fund capital projects that have
not been cancelled. As a result, there is still signicant demand for
capital in this space. Gary Brown
And how about assets which are already in production,
where a release of capital via a streaming agreement is
being considered. Do you see an increase in those types of
transactions?
I think there is a bit of a paradigm shift happening in the mining
industry in general. Historically mining companies have focused on
growth without necessarily focusing on return on invested capital.
And now I see there being a higher focus on generating returns on
invested capital. With streamings ability to unlock value and reduce
the mining companys equity exposure to a particular project, I think
that does open up additional opportunities to us. Gary Brown
You have often been quoted as saying that a streaming
arrangement creates shareholder value for both the streamer
and the seller. Why do you think this is?
There are two principal areas that highlight that value for
shareholders:
Firstly, precious metal companies typically have a lower weighted
average cost of capital than base metal companies and hence
precious metals that are hidden within a base metal asset typically
wind up getting valued with a higher weighted average cost of
capital. So when you bring them into a precious metal company like
Silver Wheaton, they have a lower weighted average cost of capital
resulting in a higher net asset value.
In addition, precious metal companies tend to trade at higher
market multiples than base metal companies, so when you take
silver from a base metal company and bring it into a precious
metals company, there is a creation of value there. This arbitrage
was really the founding principle when we created Silver Wheaton
back in 2004.
So those two characteristics havent changed through the
commodity price cycles - precious metal companies continue to
trade at better multiples and they have better access to capital than
base metals companies. Randy Smallwood
What are the key characteristics of an investment for Silver
Wheaton, and is there anything that is absolutely critical for
you to consider investing?
In terms of us selecting a mine and making that investment
into a mine, the key is the quality of the asset itself, specically
Risk aversion is driving many investors into safer, more
developed mining districts. Do you see Silver Wheaton
following this trend, or are emerging markets a key
focus for you?
Yes, we have always been and continue to be focused on
assessing all the risks inherent in a potential investment
opportunity, including assessing political risk.
When you look at our current portfolio, the majority of the
assets are located in the Americas and Western Europe, which
represent very safe jurisdictions from a political risk perspective,
and we dont see that changing. We dont see ourselves
expanding to areas that have a high level of political risk
associated with them.
We are a precious metals streaming company, but we are
focused on the silver side of things and when you look at where
silver naturally occurs in the earths crust, thats primarily
North and South America. There is signicant amount of silver
produced in China and Russia. However, those would be places
that we would have a tough time consummating a silver stream
transaction, unless we had a partner that could indemnify us
against any of the political risks that we would be exposed to.
And then you look at Africa which has pockets of high political
risks and there is really very little silver produced out of Africa,
so there is very little chance that well consummate a silver
stream transaction relative to one of those areas. The bottom
line is that we continue to see a lot of opportunity in politically
stable jurisdictions and those are the opportunities that are at
the top of our list. Gary Brown
Silver Wheaton has 19 streams with operating assets and 5
with development assets. How does Silver Wheaton manage
the increased risk associated with those in the development
stage, where the ability to exercise operational control is
limited?
We consider all of our agreements as partnerships and we
do our best to work with our partners in terms of supporting
these projects going forward and when it comes to development
assets, our primary security comes from the completion tests
and corporate guarantees that are put in place when we close
a transaction. These not only ensure that we are protected in
terms of these assets getting to market, but also have penalty
clauses to compensate us and encourage the asset to be built on
time and on budget. Typically we nd this structure is adequate
to protect us and the investor and to ensure everyones interests
are aligned. Randy Smallwood
And I would just add to that for the development stage assets, we
generally dont advance a signicant amount of the upfront funds
until permitting is in place, the mining company has secured all the
nancing required to build the particular project, and construction
has commenced. Gary Brown
With whom do you see Silver Wheaton competing for investment
opportunities over the next few years, and do you expect to see
much consolidation across the industry in the near term?
There are a couple of other companies that have adopted our
metal streaming model, but they have generally applied it to the
gold space. We are a precious metal company focused on the silver
space, and so we dont anticipate as much competition on the silver
streaming transactions.
There have been murmurs that other purely nancial investors,
private equity funds and pension funds have considered entering
the metal streaming space, but as Randy alluded to earlier, the
key component in making a good investment in metal streaming
transactions is assessing the technical aspects associated with
the mining operation and the resource itself. We have a world
class team of geologists, mining engineers and metallurgists that
we deploy in assessing those risks. It is very difcult for purely a
nancial investor to assemble such a qualied team that can focus
on that space.
And with respect to the other players that are currently in the
space, our key advantage is our size. We are the largest of the
metal streaming companies out there. That provides us with the
substantial cash ow which allows us to grow, it gives us excellent
access to the capital markets both debt and equity, and with our
highly diversied portfolio, it gives us a little more latitude with
respect to risk tolerance. I dont see the landscape changing
signicantly from a competitive perspective in the future and I see
us as having a number of advantages over the current players.
Gary Brown
Finally, can you tell us a little more about Silver Wheaton as an
investment itself? How do you feel the investment opportunity
compares to investment into a pure-play silver producer or
an ETF?
Silver Wheaton provides shareholders with a much lower risk
prole than a traditional mining investment and yet still delivers
most of the rewards that are traditionally related to a mining
investment.
When I compare us to an ETF, the rst differentiating factor is
that we provide a level of leverage to the precious metal exposure
inherent in our portfolio. This leverage arises because we dont
pay fully for every ounce of silver or gold that we gain exposure to
upfront. We defer a portion of the payment until the precious metal
is actually delivered to us. This characteristic should result in us
outperforming a straight investment in bullion which is supported
by the fact that the returns we have generated for shareholders
since the inception of the Company in 2004 are about three times
that generated from an investment in bullion.
We also provide shareholders with exposure to the exploration
and expansion upside that our portfolio has shown a propensity to
deliver. As we have previously stated, our portfolio is comprised
of very good mines and some of them are very young in their
development and have all sorts of opportunity for continued growth
through expansion and exploration success and we deliver that to
our shareholders.
We also have the opportunity to make accretive acquisitions. We
continue to grow and add value on a per share basis. One of the
key stats that I have always admired is that the shareholders who
acquired shares when this company was founded back in 2004
had about 1.5 silver equivalent ounces backing every share.
We currently have about 6 silver equivalent ounces underlying
each share in this company, highlighting just how accretive our
acquisitions have been.
We also pay a dividend which is based on a percentage of
operating cashow. With the cost of every ounce of silver or gold
being delivered to us being virtually xed contractually, basing
the dividend on operating cashows provides shareholders with
direct participation in both our enviable organic growth prole
and increases in underlying commodity prices. ETFs and bullion
investments obviously dont pay dividends.
As a result of these characteristics, we believe that Silver Wheaton
represents the best investment vehicle out there to gain precious
metal exposure. Randy Smallwood
And I would just add that shareholders are gaining access to the
expertise of the company that has not only demonstrated the ability
to consummate highly accretive transactions but, has also shown
that it has the discipline to avoid investing in assets that dont
deliver shareholder returns. Gary Brown
The window of opportunity
Only time will tell if we are witnessing a correction, a restructuring of the sector or just the start of the
new normal. The capital decisions that companies make will be the key to their success.
What is certain is that this is a cyclical industry and one where
the very factors contributing to the challenges will also force the
solution: a lull in investment will eventually lead to a contraction in
supply which will, once again, support higher commodity prices
and investment.
Meanwhile, there is a window of opportunity for those with
condence in the sector and access to longer-term, more patient
capital. These investors are looking to capitalize on reduced
competition for assets, lower valuations and a continued ow of
divestments from the large cap producers.
This window of opportunity will remain open until equity markets
for the sector recover fully and while large cap producers remain
cautious about investing. Until then, those with access to patient
private capital, including nancial investors, will have a free run to
take advantage of the current market conditions.
Spotlight
Source: S&P Capital IQ, EY analysis.
0.0
0.2
0.6
0.4
1.0
1.4
1.6
1.2
0.8
1.8
Consensus
forecast
-1,000
0
1,000
500
-500
1,500
2,500
2,000
3,000
3,500
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OperaLinq cash low less capex Net Debt/EBITDA
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
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1
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2
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1
1
2
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2
2
0
1
3
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2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
Availability of capital to undertake M&A
Top 14 globally diversied mining companies leverage and cash ow summary
Free cash ows have been squeezed over the last 18 months due
to low earnings and a record level of investment, which reached
its peak during 2012. Across our sample of the top 14 globally
diversied mining and metals companies, each company allocated
on average $6.3b
5
to capital expenditure, primarily on large-
scale, tier-one organic growth projects in an environment where
costs escalated and initial budgets were exceeded. Leverage
consequently soared as companies took advantage of the favorable
lending conditions to fund growth.
The industry has quickly reacted to this scenario: major producers
are focused on achieving cost-saving targets, productivity
improvements, divestments and scaling back capital expenditure,
while pursuing only the top-tier projects and doing so incrementally.
As a result of these actions, consensus forecasts show improved
cash ows, after capital investment, albeit modestly during
2013 and then dramatically after 2014 to levels more conducive
to investment, particularly as leverage begins to fall over the
same period.
However, while conditions lend themselves to a return to
investment, a complex capital allocation challenge exists where
investment decisions are tougher than ever. Companies are
challenged to identify a unique strategy that sets them apart
from their peers in an uncertain economic and commodity price
environment, where returns can be marginal.
5. Source: S&P Capital IQ, EY analysis.
In the immediate aftermath of recent market conditions and
changes to management, we are witnessing a greater focus on
yield. Dividends and share buybacks are being used to appease
shareholders and compensate for a perceived under-delivery on
capital returns. As the graph below shows, beyond 2014, the
forecast ramp-up in dividends is highly affordable against the
expected improved cash ows; a much lower percentage of cash
is being paid out as dividends despite the relative level increasing
signicantly.
So the question is: how does management achieve the right balance
between short-term yield and long-term capital appreciation? The
danger in seeking the former is that growth projects are snubbed at
the detriment of long-term value. Encouragingly, analysis suggests
the large cap producers, at least, should be able to satisfy both
criteria, given expected improvements to cash ows.
Its an opportunistic time for those with access to longer-term capital and with condence in
the sector to capitalize on attractive investment opportunities in the current market.
Nicky Crabtree
Mining & Metals Global Transaction
Advisory Services, Assistant Director
EY UKI
Dividend Dividend/Free cash low
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
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1
0
2
0
1
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1
2
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1
3
f
2
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6
f
0%
20%
40%
60%
80%
100%
120%
0
200
400
600
800
1,000
1,200
1,400
1,600
D
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F
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(
$
m
)
Consensus
lorecasL
Top 14 globally diversied mining companies dividend summary
Investors are presently being offered a better yield with higher
dividends set against depressed share prices. While this is yet
to ow through to improved investor sentiment, we do expect
this to happen over time. Once condence returns to the sector,
companies will have more capacity to again focus on investing
capital for growth.
This change in sentiment is not limited to the producers;
development companies are preserving capital, optimizing project
timetables and looking for a broader range of partners to de-
risk the build-out. The manner in which these companies are
approaching capital markets is also changing, where wider pools of
capital providers are being considered and capital is being stretched
further. As this group of companies is increasingly looking to attract
private equity-type investment, they are beginning to approach
investment in a more disciplined manner, setting out milestones,
increasing accountability and adjusting rewards.
Return on investment time horizon
Mining companies invest for the future that is, investments made
are not expected to generate income immediately but at some
point in the future. The graph opposite shows expected return on
capital employed (ROCE), revealing that historical investments are
unlikely to yield signicant uptick in ROCE until after 2016. This
analysis is based on consensus forecasts, which some argue to be
conservative and others realistic.
Based on these forecast returns, it will be difcult to justify a
signicant increase in M&A activity outside of investments that
present a unique or highly synergistic value proposition. This
suggests that for those investors who are able to realize this upside,
the window of opportunity will remain open for some time.
When is the timing right?
While the best time to undertake M&A is at the bottom of the
market, this has not historically proven to be the case. The graph
below demonstrates little correlation between commodity price
peaks (and possibly the timing of decisions) and when deals are
completed.
Historical M&A value vs commodity price
Value of M&A LMEX base metals Iron ore
Gold Coal
0
50
100
150
200
250
0
10,000
20,000
30,000
40,000
50,000
5,000
15,000
25,000
35,000
45,000
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Source: EY analysis, ThomsonONE, Thomson Datastream
ROCE
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
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0
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4
6
8
10
12
14
16
18
R
O
C
E

%
Consensus
forecast
Top 14 globally diversied mining companies - ROCE summary
As long as managements primary focus is on cost optimization and
driving up ROCE, in the absence of a signicant metals price jump,
we are unlikely to see a return to large-scale M&A in the near-term.
However, shareholder pressure may alleviate over time, resulting
in a situation where expectations realign to more modest levels of
ROCE, incentivized by the prospect of higher yields.
In the interim, the time for those with a longer-term investment
horizon to undertake M&A is now, where favorable valuations and
reduced competition support an attractive acquisition environment.
However, the nature of this M&A is likely to differ from that
historically, where capital is likely to be preserved for opportunities
that support a robust operational structure and margin-led growth,
rather than pure scale-led growth.
From a wider economic and commodity price environment,
the sector requires some rm consensus on valuation before
investment decisions free up more widely. Interestingly, it is those
with a clear in house view of commodity prices and other key
valuation input assumptions, including economic and commodity
prices, such as commodity traders, which are most active in the
M&A market right now.
The window will gradually close, not slam
There is no disputing that the mining and metals sector invests and
reaps its return in cycles. The cyclical nature of the industry is one
of the key determinants of how long the window of opportunity
will remain open for patient capital. While forecasts are never
conclusive, historical trends suggest larger producers will return to
investments before long, although an imminent ght for assets with
private capital looks unlikely.
Mergers &
acquisitions
1.
Preference for smaller bolt-on deals
Valuation gap
Regional M&A trends
Financial investors
Cross border activity
Commodity overview
Introspection and inertia characterized a year of subdued
M&A activity in the mining and metals sector. During the last
12 months, there was a distinct shift away from external
investing for growth toward internal capital optimization.
Traditional buyers concentrated on capital discipline,
improving balance sheet strength and maximizing return
on capital. The majors continued to pursue divestment of
non-core assets, while cash-strapped juniors struggled to
raise nance. Such a climate presents deal opportunities.
However, the sense of urgency to make them happen
was missing.
The year 2013 marked the third consecutive year of declining
M&A deal values and volume in the mining and metals sector. Deal
volume dropped 25% y-o-y, while total deal value increased by
20% to $124.7b. However, this increase was misleading as it was
primarily due to the completion of the merger between Glencore
International and Xstrata. Excluding this, overall deal value
decreased 16% to $87.3b, prolonging the downward trend of
recent years.
The mining and metals industry continued to be plagued
by volatility in commodity markets and the macroeconomic
uncertainty that characterized the last ve years. With margins
squeezed and returns from previous investments under scrutiny,
companies are hesitant to part with capital. Faith has been shaken
and investment sentiment in the industry is at an all-time low.
But, for the large cap producers at least, there is very little distress
and balance sheets are looking increasingly healthy. As diversied
mining and metals companies seek to optimize portfolios with a
focus on increasing overall margins, many of the industrys majors
have announced high-value divestment programs. During 2013,
the industrys top ve diversied mining majors completed $6.3b
6
of divestitures, while $5.5b of deals have been agreed and are
expected to complete during 2014. As it stands, the Las Bambas
divestment by Glencore Xstrata appears to be the last major
divestment across the top ve major producers that is still in the
process of nding a buyer. Other examples of divestments made in
2013 include the following:
BHP Billiton divested its Pinto Valley mining operation and
associated San Manuel Arizona Railroad Company ($650m)
7
,
interests in the EKATI Diamond Mine and Diamonds Marketing
operations ($553m),
8
and the East and West Browse joint
venture ($1.63b).
9
Vale sold its shares in Norsk Hydro for $1.82b,
10
and announced
the sale of its Araucaria fertilizer plant for $234m
11
and its stake
in the Brazilian BM-ES-22A oil and gas concession for $40m.
12
Rio Tinto sold its 80% interest in Northparkes ($820m);
13
agreed the sale of its Eagle project to Lundin (c.$325m);
14
and
completed the sale of its 57.7% effective interest in Palabora
Mining Company ($373m);
15
the North American portion of its
Alcan Cable business ($151m) in 2012;
16
and 50% stake in the
Clermont mine ($1b).
17
6. Including Vales $1.8b sale of its Norsk Hydro shares, which falls outside of the M&A data
within this report.
7. BHP Billiton completes sale of Pinto Valley to Capstone Mining Corp, BHP Billiton press
release, 11 October 2013.
8. BHP Billiton completes diamond business to Dominion Diamond Corporation, BHP Billiton press
release, 10 April 2013.
9. BHP Billiton completes the sale of interest in East and West Browse joint venture, BHP Billiton
press release, 7 June 2013.
10. Vale sells all of its shares in Norsk Hydro with the exercise of the over-allotment option, Vale
press release, 14 November 2013.
11. Vale to sell fertilizers asset, Vale press release, 18 December 2012.
12. Vale to sell stake in oil and gas concession, Vale press release, 26 December 2012.
13. Rio Tinto agrees to sell of interests in Northparkes, Rio Tinto press release, 28 July 2013.
14. Rio Tinto agrees sale of Eagle project, Rio Tinto press release, 12 June 2013.
15. Rio Tinto agrees sale of shareholding in Palabora, Rio Tinto press release, 11 December 2012.
16. Rio Tinto completes sale of Alcan Cables North American business, Rio Tinto press
release, 5 September 2012.
17. Rio Tinto agrees sale of interest in Clermont mine, Rio Tinto press release, 25 October 2013.
2013 was a tough year for M&A across the sector. There was a lack of desire to pursue
acquisitive growth and for those with multiple assets there was insufcient distress to force
divestment. The most signicant deal of the year, the merger of Glencore International and
Xstrata, was unique in nature, was all equity and represented 30% of deal value for the year.
Lee Downham
Global Mining & Metals Transactions
Leader, EY
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*
Volume 475 596 564 701 903 919 1,047 1,123 1,008 941 702
Value ($m) 46,182 26,350 65,430 175,713 210,848 126,884 60,035 113,706 162,439 104,014 87,309
Average value ($m) 97 44 116 251 233 138 57 101 161 111 124
Median value ($m) 4.4 3.1 4.8 6.2 7.2 6.0 3.2 5.2 5.6 5.0 3.8
Volume and value of deals (2003-2013)
*Excluding Glencore Xstrata merger
Additionally, most of the majors focused their strength on achieving
cost saving targets and scaling back capital expenditure while
pursuing only the top tier projects and doing so incrementally.
For instance:
Rio Tinto reduced operating costs by $2b by the end of 2013
and is scaling back capital expenditure 20% y-o-y for the next
two years.
18
Anglo American will deliver about $1.3b annually by cutting
overhead costs, reducing its project pipeline and generating
more value from product sales.
19
AngloGold Ashanti plans cuts of $460m from corporate and
exploration costs and $500m from operating cost savings.
20
This activity, together with other rationalization measures and
an uptick in iron ore prices during the back end of 2013, has
strengthened cash ows and balance sheets and eased the
pressure to divest non-core or underperforming assets.
As such, investing activities remained subdued in 2013 and any
expectation of rock-bottom asset sales seems off the mark. These
conditions collectively point toward deal inertia. With buyers looking
for bargains and sellers in no mood to let assets go cheaply, its
a stalemate.
Valuation gap increasingly difcult
to bridge
However, the gap between buyers and sellers valuation
expectations is not only the preserve of the large cap producers.
A total of 74% of the respondents to EYs Capital Condence
Barometer Survey for Mining and Metals, released in October 2013,
believe that a valuation gap of 10% -30% currently exists. Further,
the expectation of the majority of respondents is that the gap is
going to remain or even increase.
A disparity in analysts forecast for metal prices, fueled by differing
expectations for world economic growth, is producing a broad
range of asset valuations. This is only serving to widen the gap
between buyer and seller expectations on price and hinder deal
completion. While some believe that current equity valuations
are wildly undervalued, others consider this to be a much-needed
market correction. From any vantage point, it is a challenging
18. Rio Tinto is delivering on its commitment to create greater value for shareholders, Rio Tinto
Investor Presentation, 3 December 2013.
19. Anglo American chief plans $1.3bn cash uplift in shake-up, The Telegraph, 26 July 2013.
Half year nancial report for the six months ended 30 June 2013, Anglo American report,
26 July 2013.
20. AngloGold Q3 earnings jump on 12% output gain, 10% cost decline, AngloGold Ashanti press
release, 6 November 2013.
backdrop against which to make investment decisions. With price
volatility expected to continue for a few more years as the supply
and demand balance struggles to achieve equilibrium, both buyers
and sellers will need to be innovative in their approach
to valuations.
2
0
0
4
2
0
0
3
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
<$200m
>$1b
Between $200m and $1b
Volume
D
e
a
l

v
a
l
u
e

(
$
b
)
D
e
a
l

v
o
l
u
m
e
-
50
100
150
200
250
0
200
400
600
800
1,000
1,200
Volume and value of deals by size (2003-2013)
Financial investors embrace opportunities
Despite challenging market conditions, the sectors new entrants
appear to be nding a way to successfully navigate the M&A
landscape. During the last 12 months, nancial investors increased
their share of total M&A undertaken by value from 5% in 2012
to 19% in 2013. This stands to reason given that many nancial
investors are countercyclical, attracted by the prospect of
potentially strong returns driven by low asset valuations.
In 2013, 5 of the 19 megadeals (>$1b) were undertaken by
nancial investors:
1. The $3.6b joint investment by Lizarazu and Receza in Polyus
Gold International
2. Onexim Groups $3.5b investment in Uralkali
3. Chengdong Investment Corps $2b (12.5%) stake in Uralkali
4. Samruk-Kazynas $1.7b investment in Kazzinc
5. Crispian Investments $1.5b investment in Norilsk Nickel
These deals highlight the disparity between market valuations and
the underlying value that a strategic and more patient investor can
attribute. In most part, these megadeals demonstrated a belief by
the nancial investor that the market was being too risk averse.
This investor group has typically sought to acquire minority stakes,
evidenced by the fact that 64% of their 2013 deals were for a stake
of less than 50% in the company and 88% were valued below $50m.
Emerging nancial investors include Former Xstrata CEO Mick
Davis, who recently set up X2 Resources, Former Barrick CEO
Aaron Regent who established Magris Resources, and former Vale
CEO Roger Agnelli, together with fund company Grupo BTG Pactual
SA, established B&A Minerao.
This is a trend we expect to see continue. We also anticipate
further interest from specialist funds and individuals over the next
12 months, led by a number of former mining leaders lending their
expertise to privately held capital, said Nicky Crabtree, Assistant
Director, Transaction Advisory Services, Mining & Metals, EY.
There is potential for ongoing activity in the year ahead, driven
by these former mining leaders with in-house technical and
operational expertise and a keen eye for strategic assets in the
sector. The current capital-raising environment will present a
window of opportunity for well-capitalized fund companies and a
much-needed injection of capital for mining and metals companies.
These specialist nancial investors are likely to become mainstream
investors in the years ahead, lling the gap until traditional
acquirers and equity market condence return.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2013
2012
2011
Low risk (domestic consolidation)
Strategic (supply/security)
Geographic expansion
Low risk (existing stake)
MarkeL enLry/diversilcaLion
Disposal/exit/buy-out
Megadeal drivers share of deal value (2011-2013)
Preference for smaller bolt-on deals
Given that 2013 was characterized by senior management changes
and strong rhetoric to display capital discipline, it is not surprising
that high prole megadeals were largely abandoned and leaders
instead chose to undertake lower risk bolt-on deals.
There was just 1 deal undertaken with a value in excess of $10b
the Glencore Xstrata merger and only 19 deals that fetched more
than $1b a piece, compared with 26 such deals in 2012. These
megadeals comprised 72% of the total value of M&A deals closed
during the year but represented only 2.7% of total deal volume.
Many large deals that did occur were one-off, unique in nature and
not reective of the market sentiment as a whole. For example,
the merger of Dubai Aluminium (DUBAL) with Emirates Aluminium
(EMAL) to create a new entity, Emirates Global Aluminium the
only reported deal out of the UAE was driven by a nationalistic
desire by Dubai and Abu Dhabi to consolidate their state aluminium
producers and strengthen their position globally.
21
The two major oil and gas acquisitions by Freeport-McMoRan
Copper & Gold accounted for 7% of total deal value (10% when
excluding the Glencore Xstrata merger) and were driven by a desire
to diversify out of the mining and metals space.
The remaining megadeals were largely low risk, fueled by a desire
to increase an existing stake, achieve domestic consolidation or
a strategic attempt to secure future supply. For as long as the
majors remain heavily focused on strengthening their bottom
lines, simplifying portfolios and riding out volatility, any increase in
high-value acquisitions is unlikely in the near future, short of these
unique or highly synergistic opportunities.
21. Update 2 Aluminium merger hints at closer Dubai, Abu Dhabi ties, Reuters,
www.uk.reuters.com, 3 June 2013.
Share of deal value by acquirer type (2011-2013)
Industry acquirers
State-backed acquirers
Other sectors
Financial investors
Commodity traders
Undisclosed
0% 20% 40% 60% 80% 100%
2011
2012
2013*
Rank Value
($m)
Type Target name Target
country
Target
commodity
Acquirer Acquirer
country
Acquirer
commodity
Share
(%)
1 37,439 Domestic Xstrata Switzerland Diversied Glencore International Switzerland Trading company 65.9
2 7,500 Domestic DUBAL (Dubai Aluminium
Company Limited)
United Arab
Emirates
Aluminium Emirates Aluminium Co United Arab
Emirates
Aluminium 100.0
3 6,450 Domestic Plains Exploration &
Production Co
US Oil & gas Freeport-McMoRan Copper & Gold US Copper 100.0
4 5,058 Domestic Inmet Mining Corp Canada Copper First Quantum Minerals Canada Copper 94.0
5 3,911 Domestic Sterlite Industries (India) India Diversied Sesa Goa India Iron Ore 100.0
6 3,620 Domestic Polyus Gold International Russia Gold Lizarazu and Receza Russia Financial investor 37.8
7 3,543 Domestic Uralkali Russia Potash/
phosphate
Onexim Group Russia Financial investor 21.8
8 3,462 Domestic Consolidation Coal US Coal Murray Energy Corp US Coal 100.0
9 2,616 Domestic Hyundai Hysco - Steel milling
business
South
Korea
Steel Hyundai Steel South Korea Steel 100.0
10 2,611 Domestic Titanium Metals Corp US Titanium Precision Castparts Corp US Aircraft
components
90.4
11 2,218 Cross
border
Eurasian Natural Resources UK Diversied Eurasian Resources Group Luxembourg Consortium 55.4
12 2,100 Domestic McMoRan Exploration Co US Oil & gas Freeport-McMoRan Copper & Gold US Copper 64.0
13 2,000 Cross
border
Uralkali Russia Potash/
phosphate
Chengdong Investment Corp China Sovereign wealth
fund
12.5
14 1,650 Domestic Kazzinc Kazakhstan Silver/lead/zinc Samruk-Kazyna Kazakhstan Sovereign wealth
fund
29.8
15 1,487 Domestic GMK Noril'skiy Nikel' (Norilsk
Nickel)
Russia Nickel Crispian Investments Russia Financial investor 5.9
16 1,347 Cross
border
Uranium One Kazakhstan Uranium ARMZ Russia Uranium 48.4
17 1,109 Cross
border
ArcelorMittal Mines Canada Canada Iron ore POSCO; China Steel; EQ-Partners South Korea Steel 15.0
18 1,105 Cross
border
CGA Mining Philippines Gold B2Gold Corp Canada Gold 100.0
19 1,077 Domestic Henan Dayou Energy Co China Coal Investor Group China Coal 26.3
Megadeals (2013)
The table above includes deals that are reported as mergers of equals. However, targets and acquirers are assigned for the purposes of analysis per ThomsonONE classications.
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Cross-border Domestic
65% 65%
60%
59%
43%
67%
55%
52%
48%
58%
35% 35%
40%
41%
57%
33%
45%
48%
52%
42%
Share of cross-border and domestic deals, by volume (2004-2013)
Cross-border activity declining
popularity
The year 2013 saw the rst fall in the proportion of cross-border
deal activity since the global nancial crisis (GFC) in 2008.
Outbound activity, as a proportion of the total M&A volume, fell
from 52% to 42% y-o-y, with only 18% of the total deal value for the
year targeting cross-border assets.
The ow-on effect was a signicant increase in the value of
domestic deal activity, which rose from $43.3b in 2012 to $65.1b
in 2013 (excluding the Glencore Xstrata merger), accounting for
75% of the entire deal value for the year. All of the top 10 deals
were domestic targets, while two of the largest deals the merger
of DUBAL with EMAL and the merger of Sterlite Industries into Sesa
Goa were driven by nationalistic consolidation. The remaining
megadeals were largely low risk, fueled by a desire to increase
an existing stake, achieve domestic consolidation or a strategic
attempt to secure supply.
Target region 2008 2009 2010 2011 2012 2013* Y-o-Y change*
North America 48,520 15,420 22,200 54,187 13,306 26,923 102%
Asia Pacic 29,611 20,505 38,955 38,297 41,055 25,365 -38%
CIS 3,553 3,836 3,718 23,894 5,418 17,939 231%
Middle East - - 1,605 131 - 7,500 -
Europe 26,432 4,608 6,613 3,564 10,424 3,863 -63%
Latin America 16,924 12,139 23,957 22,084 13,872 2,792 -80%
Africa 1,844 3,285 16,657 20,282 19,940 2,927 -85%
Total 126,884 60,035 113,706 162,439 104,014 87,309 -16%
Value of deals by target region ($m)
Cross-border statistics point to a very cautious sector,
one that is holding back from high-risk cross-border
investments that are difcult to value and justify. It
is not surprising that 2013 M&A activity was largely
focused on creating value in familiar territories.
Jodie Eldridge
M&A Analyst, Mining & Metals, EY
Australia
Regional M&A trends
In 2013, Europe was both the most targeted and the most
acquisitive region by deal value due to the Glencore Xstrata deal.
Excluding this deal, North America was the most targeted region
with 31% of deal value, narrowly leading Asia Pacic (29%). North
America and the Asia-Pacic region tied as the most acquisitive
regions by deal value, each with 33%.
At a country level, excluding Switzerlands Glencore Xstrata merger,
the US was the most targeted by value ($18b or 21%) and Canada
was the most targeted by volume (153 or 22%). Similarly, the US
was the most acquisitive country by value (21%) and Canada by
volume (30%). The value of US domestic deals rose from $2b in
2012 to $16.6b in 2013, and Canada from $2.2b to $6.8b. Within
these countries, buyers mostly targeted assets within their existing
commodity focus and looked to strategically create growth and
efciencies locally.
The unusually high deal value targeting the Middle East is
attributable exclusively to the DUBAL-EMAL merger completed
in 2013, rather than an overall surge in activity from this region.
Similarly, the CIS more than trebled its value of deal investment
on a urry of large domestic private investor activity in the
gold and coal sectors plus the $5.5b worth of investment into
potash producer, Uralkali, by Onexim Group and Chengdong
Investment Group.
Activity in emerging and frontier regions slowed during 2013, with
the value of deals targeting Latin America and Africa dropping
80% and 85% y-o-y, respectively. The drop-off is not surprising
during a period of cautious capital deployment; there is a tendency
instead to invest in mature, developed and stable jurisdictions. It
is likely that investment capital is being prioritized to projects that
do not have the added burden of signicant infrastructure capital
that often accompanies large-scale emerging market projects.
Encouragingly, this is likely to be a short-term phenomenon.
The drop in Chinas outbound and domestic deal value (a fall of 42%
and 22%, respectively, in 2013) can be attributed to new leadership
and major structural reforms as it switches from a growth-based
economy to a consumption-based one.
22
In particular, stricter rules
around environmental protection and public backlash against health
and safety standards have impacted the Chinese mining and metals
industry. Overcapacity of supply in coal, steel and iron ore has
impacted short-term pricing, making investments into
anything other than high margin projects difcult to justify at this
point in time.
Although China is still dependent on commodity imports to supply
its large-scale capital expansion, the post-GFC strategy to secure
supply through large-scale acquisitions slowed during 2013.
Many of the recent deals have been subject to greater scrutiny,
in particular over prices paid, which is driving a more cautious
approach to M&A.
22. Changing China set to shake the world economy, again, Reuters, 16 September 2013.
Consequently, buyers have increasingly been exploring alternative
routes, such as off-take agreements and providing pre-export
nance as an alternative method of securing supply over outright
acquisition. For example, Yunnan TCT Yong-Zhe Company signed an
agreement with Sirius Minerals for off-take (initially xed price) and
an ongoing collaboration arrangement instead of taking an equity
stake in the polyhalite developer.
23
23. Major polyhalite off take contract, Sirius Minerals press release, 27 June 2013.
Acquiring region 2008 2009 2010 2011 2012 2013* Y-o-Y change*
North America 35,057 13,661 35,481 48,964 16,961 28,487 68%
Asia Pacic 46,148 20,197 49,688 58,924 47,903 28,535 -40%
CIS 13,015 5,248 4,196 19,457 4,131 14,090 241%
Middle East - 72 533 231 53 7,923 14758%
Europe 24,074 11,182 7,528 28,438 23,035 6,480 -72%
Africa 511 1,419 1,480 2,437 2,633 1,333 -49%
Latin America 8,079 8,181 14,799 3,987 9,287 436 -95%
Undisclosed - 75 - - 9 26 185%
Total 126,884 60,035 113,706 162,439 104,014 87,309 -16%
Value of deals by acquiring region ($m)
The waning appetite for Chinese outbound M&A deals,
including state-backed investors, is partly driven
by greater accountability requirements. The
Chinese Government has been concerned about
capital-intensive foreign acquisitions in recent
years, many of which are not yet protable or even
operating due to a lack of infrastructure.
Eleanor Wu
China Outbound Transactions Leader,
EY China
The increase in North American activity was motivated
by greater clarity around macro-economic conditions
and a desire to strengthen balance sheets in order to
better ride out the volatility in commodity markets.
The majority of deals were domestic in nature.
Robert Stall
Americas Mining and Metals Transactions Leader, EY
Outbound (bubble size = deal value) Domestic (bubble size = deal value)
Canada
China
Russia
Australia
Brazil
Mexico
5.3
9.8
10.8
0.5
0.1
1.3
2.2
Finland
2.2
0.4
0.3
South Africa
0.1
6.8
3.1
Germany
US
0.7
16.6
2.0
0.4
0.3
0.3
0.3
Kazakhstan
1.0
0.3
1.4
Philippines
1.1
0.8
M&A outows for key nations
Commodity overview
Gold surpassed steel this year as the most sought-after commodity:
it was the target of 34% (237) of deals and $12b of investment.
A total of 47% of gold buyers came from outside the gold sector,
of which nancial investors represented 22%. This is a trend likely
to continue as gold prices remain under pressure, costs look set to
increase and the dwindling share prices of junior players make them
0.9
0.9
1.4
1.8
1.9
3.2
4.5
6.3
7.5
8.6
9.2
9.5
15.3
16.4
Rare earths/lithium
Diversiled
1radinq company`
Silver/lead/zinc
Uranium
ConsorLium
lron Ore
Cold
Coal
OLher
Aluminium
Steel
Copper
Financial invesLor
Value of deals by acquirer commodity ($b)
*Excludes the Glencore Xstrata merger
Financial investors include sovereign wealth funds, investment funds, investment companies, and
individual investors.
Other includes mining services, minor metals, and acquirers from other sectors such as automotive,
aggregates, technology, and fertilizers.
attractive targets for those willing to see out volatile short-term
prices. Additionally, nancial investors will be an increasing source
of nance as the ow of debt and equity into gold juniors/explorers
remains elusive. As margins increasingly look to be under pressure
and the specter of devastating impairments in recent years
remains, gold players that are able to rationalize operations, share
risk through joint ventures, achieve cost savings and improved cash
ows by pursuing divestitures will enjoy the greatest returns.
*Excludes the Glencore Xstrata merger
Other includes minor metals/minerals and backward integration assets (such as power, marine port
facilities, fertilizer manufacture).
Value of deals by target commodity ($b)
1.3
1.5
1.9
2.8
3.3
3.6
5.9
6.0
6.2
6.9
7.9
8.9
9.1
10.1
12.0
Rare earths/lithium
Nickel
Uranium
Silver/lead/zinc
Iron ore
Other non-ferrous metals
Potash/phosphate
Steel
Diversiled`
Other
Coal
Copper
Oil & gas
Aluminium
Gold
In 2013, aluminium deal value was uncharacteristically high due to
the $7.5b merger between Dubai Aluminium (DUBAL) and Emirates
Aluminium (EMAL). This deal was driven by integration, merging
the smelting capabilities of Dubai and Abu Dhabi to form the worlds
fth largest aluminium company and to further develop the UAEs
non-oil based economy.
Oil and gas gures were also high on the back of Freeport-McMoRan
Copper & Golds $8.6b acquisitions of Plains Exploration and
Production and McMoRan Exploration, which comprised 94% of the
entire value of oil and gas interests by the mining sector. Freeport-
McMoRan Copper & Gold, which has previously held assets in this
space, was attracted by strong fundamentals in the oil and gas
sector and the opportunity to reduce its exposure to uctuating
metal prices.
While 2013 deal activity was down on 2012, copper was still one
of the most-sought after commodities, evidenced by a couple of big
value deals during the year. Stand-out copper transactions included
Capstone Minings $650m acquisition of BHP Billitons Pinto Valley
copper mine, First Quantum Minerals $5.1b takeover of Inmet
Mining and China Molybdenums purchase of Northparkes mines
from Rio Tinto for $820m. As with gold, strong, long-term demand
prospects and depressed valuations provide a good opportunity for
nancial investors to invest in copper.
The value and volume of deals involving energy commodities were
among the worst hit in 2013 due to continuing market weakness
and the threat of alternate energy sources. Deal value for the
acquisition of coal assets dropped 56% y-o-y, while the value of
deals targeting uranium fell 51%. In addition, we witnessed a 55%
fall in y-o-y deal value targeting iron ore assets, where an uncertain
price environment challenged deal execution.
We do expect this to change, however, as coal and iron ore assets
are increasingly being targeted by commodity traders, with several
large deals on the horizon.
For example, Rio Tinto looks likely to sells its stake in the Clermont
coal mine in Australia to Glencore Xstrata and Sumitomo, while
BHP Billiton has also announced the sale of stakes in its Jimblebar
iron ore assets to Itochu Corp and Mitsui & Co. In addition, in 2013,
Noble Group concluded minority stake acquisitions in coal miners,
Resource Generation and Pan Asia Corp, and recently announced a
21% stake purchase in Cockatoo Coal. Commodity traders are also
looking to secure long-term future supply of these commodities
through off-take agreements, loan facilities and investment in
low-cost assets on expected future delivery to high-demand growth
markets, such as China and India. Stable supply available out of
Australia makes this region particularly attractive for this kind
of arrangement.
Capital
raising
2.
Convertible bonds
The equity markets
IPOs
Bonds
The credit environment
Syndicated loans
Follow-on equity
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
-
50
100
150
200
250
300
350
400
Loans Bonds Convertibles Follow ons IPOs
P
r
o
c
e
e
d
s

(
$
b
)
Capital raised by the mining and metals sector (2007-2013)
This was a year that saw the twin challenges of capital
allocation and access to capital top EYs business risks
in mining and metals radar,
24
against a backdrop of weak
prices, depressed earnings, squeezed margins and broken
condence. Mining and metals equities signicantly
underperformed other sectors and commodity prices over
the rst half of the year, as investors lost conviction in
managements ability to deliver satisfactory returns at
the top of the industry and in the rationality of risk-taking
at the bottom.
Global economic uncertainty persisted, with a weaker growth rate
in China, continued nancial difculties in European economies and
the protracted negotiations over the US debt ceiling. This made
for a challenging nancing environment and a subdued near-
term outlook for metals prices. Bond markets were volatile, while
leverage risk intensied for sub-sectors of the industry.
As a result, most management teams turned their focus inward to
steady the ship, resulting in capital restructurings, reduced capital
expenditure and subdued acquisitive growth.
However, improving sentiment over the closing months of the
year, supported by a tentative recovery in metals prices, suggests
the tide may be slowly turning. The majors reported strong third
quarter production; industry-wide cost savings and cash release
programs have begun to yield results; and shareholders are
welcoming the greater commitment to near-term capital returns.
The industry is steadily restoring condence, and some much-
needed optimism is gradually returning in 2014.
24. EY, Business risks facing mining and metals, 2013-2014, www.ey.com/miningandmetals.
The credit environment: changes on
the horizon
Bond markets were beset by volatility in 2013. Fears in July that
the US Federal Reserve would begin to taper quantitative easing
(QE) inhibited bond issuance over the third quarter, but as those
fears temporarily subsided, investment grade issuers in the sector
took advantage of revived demand for yield.
However, there were early signs of some inherent risks, with 2014
set to bring a shift in the interest rate cycle and, with it, the risk of
selective demand and higher funding costs for issuers. Critical to
the year ahead is how the markets deal with the timetable for QE
tapering. This impact will potentially be felt beyond the US markets,
with emerging markets having already seen signicant outows in
2013 and Asian investors fearing tighter borrowing conditions.
25
Loan markets have seen strong liquidity, particularly in Europe, with
competition among banks driving down pricing for high grade deals.
However, syndicated lending remains the preserve of strong names
with strong banking relationships to match.
Credit rating migration was overwhelmingly negative in 2013 as
volatile commodity prices squeezed the margins of producers and
exposed them to greater leverage risk. The severity of this risk
naturally varied across different commodity groups, with gold,
steel and coal producers accounting for the majority of 2013 rating
downgrades. Persistent overcapacity continues to hamper the
steel sector, while thermal coal prices remain under pressure due
to signicant oversupply. The gold price, down 27% over 2013,
remains vulnerable to anticipated events impacting the US dollar,
interest rates and ination in 2014.
25. Fitch street view: Asian investors fear corp liquidity drain on Fed tapering,
Fitch Ratings, 17 November 2013.
An overall annual increase in capital raised by the mining and metals industry in 2013, to
$272b, masks what was, in reality, a highly challenging and volatile year one that may
prove to be a turning point in the capital and investment cycle.
Strategic Analyst, Global Mining & Metals
Emily Colborne
Net debt/EBITDA by peer group (2006-2015f)
2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f
Consensus forecast
N
e
t

d
e
b
t
/
E
B
I
T
D
A
1op 5 diversileds Coal producers Gold producers
Steel producers High yield mid-tiers
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Source: S&P Capital IQ, EY analysis
High-yield mid-tier producers with single commodity exposure
were particularly vulnerable in 2013; two S&P-rated defaults in
the sector, although rare, illustrated the severity and changeability
of the market conditions. However, actions taken by companies to
respond to this risk deleveraging through non-core divestments,
cost cutting, capacity cutbacks and productivity improvements
paint a more optimistic picture as we head into 2014.
The equity markets: improved hope for
a recovery
Echoing 2009 but on a much smaller scale, equity markets
supported balance sheet rehabilitation among a number of debt-
burdened producers in 2013. But equity funding to the junior
sector was exceptionally constrained. Proceeds raised from
secondary issues by juniors fell 43% y-o-y, from an already low base,
with inevitable implications for global exploration spend.
Investors are looking for low risk, near-term, high-yield
opportunities, which the early-stage junior mining sector cannot
offer at the present time. Juniors are also unable to match the
apparent wait and see approach being adopted by investors, in
the face of escalating operational costs and challenges combining
to push out the period from discovery to cash-ow. Without the
surety of near-term returns, equity markets are unwilling to take on
the additional risk in the current environment and it may be some
time before condence returns for explorers.
While the timing of a shift back to equities is impossible to predict,
we do anticipate a gradual improvement over 2014. This has
already begun with sectors that offer predictable dividend income,
but we ultimately see this moving to higher-risk cyclical sectors
as investors regain condence and equities begin to offer better
returns again. At the moment, the mantra is selectivity; for while
the vast swathe of early stage explorers are struggling in the
current environment, equity (and indeed debt) is nding its way
to advancing projects where management have been able to
demonstrate tangible returns and realistic growth potential.
The challenging conditions in public equity markets continue to
prop open a window of opportunity for private capital investors
and alternative funding structures and providers. We discuss this
further in our two Spotlight articles.
Bonds
Mining and metals companies issued $88b of bonds in 2013.
This represented a 22% decrease on 2012 against the backdrop
of another record-breaking year globally (across all sectors). The
decline in issuance by the sector partly reects the impact of
macro-economic uncertainty, particularly in the US markets, but
also reduced appetite, with the majors having largely restructured
balance sheets sufciently already.
Relative performance of equities and commodities (2013)
40
50
60
70
80
90
100
110
120
130
J
a
n

2
0
1
3
F
e
b

2
0
1
3
M
a
r

2
0
1
3
A
p
r

2
0
1
3
M
a
y

2
0
1
3
J
u
n

2
0
1
3
J
u
l

2
0
1
3
A
u
g

2
0
1
3
S
e
p

2
0
1
3
O
c
t

2
0
1
3
N
o
v

2
0
1
3
LMEX index Gold Iron ore
Euromoney Global Mining & Steel S&P 500 Composite
Source: Thomson Datastream. Rebased to 2 January 2013.
Q1-13 Q2-13 Q3-13 Q4-13
Upgrades Downgrades
2
9
4
19
2
10
4
24
S&P ratings migration mining and metals (2013)
Source: S&P Ratings Direct. Represents foreign long-term issuer credit rating.
Rated universe: 183 entities
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
2
0
2
1
2
0
2
2
2
0
2
3
2
0
2
4
2
0
2
6
2
0
2
7
2
0
2
8
2
0
2
9
2
0
3
1
2
0
3
2
2
0
3
3
2
0
3
4
2
0
3
5
2
0
3
6
2
0
3
7
2
0
3
9
2
0
4
1
2
0
4
2
2
0
4
3
2
0
5
2
-
2
4
6
8
10
12
14
16
A
m
o
u
n
t

o
u
t
s
t
a
n
d
i
n
g

(
$
b
)
Maturity year
Fixed income: total amount outstanding, top ve diversied miners
Source: S&P Capital IQ. As at 10 January 2014.
Market conditions remained in favor of investment grade issuers
for most of the year, except in periods of extreme volatility. The
average coupon on high grade US dollar bonds of <10 year
maturities fell to 2.4%, from 3% in 2012, while the average spread
above the benchmark narrowed to 168bps from 199bps. The
average tenor of US dollar bonds decreased slightly to 10 years,
from 12 years in 2012.
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Proceeds Number
-
20
40
60
80
100
120
-
50
100
150
200
250
P
r
o
c
e
e
d
s

(
$
b
)
N
u
m
b
e
r
Bond volume and proceeds (2000-2013) The major producers continued to take advantage of these
conditions, and with signicant maturities on the horizon, are
likely to continue to do so for as long as market conditions permit.
Companies are still pursuing renancing options to manage their
repayment risk through diversication and extension of maturities.
Issuance in 2013 saw the inclusion of oating rate tranches a
response to investor fears of being locked into low rates in a rising
interest rate environment. Foreign currency tranches were also a
feature for example, Anglo Americans Kangaroo bond
26
and BHP
Billitons Maple bond
27
as companies sought to diversify funding
sources and tap localized demand for high grade issues offering
higher yields than government debt.
While investment grade issuance remained healthy, emerging
market and high yield issues bore the brunt of market volatility
and risk aversion. Emerging markets endured turmoil in 2013 as
investors withdrew en masse at the prospect of an end to scal
stimulus in the US and lower economic growth in those economies.
26. Bonds issued in Australian dollars by foreign/international issuers.
27. Bonds issued in Canadian dollars by foreign/international issuers.
From a mining and metals perspective, investors became more
selective, seeking comfort in safe names. Codelco reportedly
attracted more than $2b demand for a $950m issue, with S&P
upgrading the companys foreign currency issuer credit rating
to AA- from A on the strength of closer ties with the Chilean
Government. Samarco Minerao, a Brazilian iron ore joint venture
between Vale and BHP Billiton, reportedly attracted $1.25b of
offers for a $699m US dollar 10-year issue yielding 5.8%.
28
High yield bond issues by mining and metals companies also
declined signicantly y-o-y, contrary to the trend seen across
sectors. This may, in part, be due to investor concerns about
liquidity and re-nancing risk among highly leveraged mid-tier
companies in light of a subdued outlook for metals prices in 2014.
A positive development, however, was support for debut bonds
and for unrated issues such as that of Eramet in November. Hecla
Mining and St Barbara made two such debuts, securing $500m
of 6.875% notes maturing in 2021, and $250m of 8.875% notes
maturing in 2018, respectively.
28. Brazils Samarco raised $700m from overseas bond issue, Wall Street
Journal, 22 October 2013.
-
2
4
6
8
10
12
14
16
-
20
40
60
80
100
120
140
160
Proceeds Number
P
r
o
c
e
e
d
s

(
$
b
)
N
u
m
b
e
r
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Convertible bond volume and proceeds (2000-2013)
Convertible bonds
The biggest growth story of the year was that of convertible
bonds, which saw a 32% increase in volume and a 119% increase in
proceeds raised, albeit from a low base.
Convertible bonds enjoyed record popularity as an asset class in
2013. Their attractiveness to investors is not surprising: they offer
the xed income properties of corporate bonds (a xed payment,
xed maturity and set redemption value) and the potential for
future upside from conversion to equity in the expectation of share
price growth over the bonds tenor.
Furthermore, investors in 2013 mining and metals convertible
bonds were securing coupon rates comparable with those they
might receive on vanilla high-yield bonds. This is contrary to
historical precedence that would see issuers pay lower coupons to
compensate for the potential equity dilution. The average coupon
paid in 2013 was 9%, with one issue offering 22.5%. This partly
reects the high proportion of early-stage, unrated and therefore
higher risk companies issuing convertibles in the absence of many
alternatives. Any lack of condence in the upside potential of the
share price is compensated by the high yield that investors are
receiving for the debt component.
The high cost of borrowing presents increased risk for pre-
production companies, which account for more than 70% of 2013
convertible bond issues. In addition, in an environment of falling
share prices, there is the possibility that bondholders will opt not to
convert some gold companies with convertibles maturing in 2013
have faced this challenge. The risk of default, should companies not
be in a position to meet the principal repayments on maturity, is
thus high, and a number of companies have returned to market for
funding to redeem maturing convertible bonds.
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Proceeds Number
P
r
o
c
e
e
d
s

(
$
b
)
0
20
40
60
80
100
120
140
160
180
200
0
50
100
150
200
250
300
350
N
u
m
b
e
r
Syndicated loan volume and proceeds (2000-2013)
3%
9%
10%
11%
17%
50%
Capex
General corporate purposes
Pro|ecL lnance
Other
Acquisitions
Relnancinq
Primary use of proceeds, by share of total proceeds (2013)
Syndicated loans
Bank lending to the sector increased 40% y-o-y to $149b, but the
scale of the increase is somewhat misleading. A $17.3b renancing
by Glencore Xstrata, for example reportedly the largest corporate
loan renancing in any sector in Europe for
over ve years accounted for a signicant proportion (12%)
of that total.
Around half of the total loan proceeds were amendments, increases
and extensions to existing credit agreements, with a relatively
small proportion of lending coming in the form of new agreements
for project nancing. Syndicated deals remain rare for smaller
companies.
Nevertheless, the $74b of renancing completed in the year is
vital for the industry. Borrowers consistently point to the strength
of their banking relationships as critical to their ability to roll-
over credit, and to do so on improved terms. While the ongoing
implementation of Basel III has irrevocably changed the global
nancing landscape, improving economic condence, strong
liquidity and intense competition among banks seeking growth and
ancillary business opportunities, has resulted in a strong year for
credit markets and improved borrowing conditions for corporates in
2013. Rio Tinto is said to have renanced early to take advantage
of improved pricing, while others amended existing debt facilities
through the easing of covenants and extension of maturities.
Average spreads on non-leveraged loans narrowed to 147bps in
2013 from 174bps in 2012.
The threat of rising interest rates, along with strong demand among
lenders, led to an increase in European and US leveraged loans
(all sectors), a reection of improved condence in those
economies and the attraction of oating interest rates. This
translated into improved access to debt for mid-tier miners with
strong banking relationships access that proved constrained in
the volatile high yield bond markets. Indeed, banks have offered
greater exibility, and, in some cases, better pricing, than the
xed income markets could offer, particularly for unrated issuers.
Syndicated project nance closed in 2013 reached only $13.4b,
albeit an increase from the $5b closed in 2012. This is perhaps a
reection of slowed investment by the industry this year as much
as an indication of constrained funding. Tata Steels Odisha project
in India and the EMAL 2 joint venture between Mubadala and
Dubai Aluminium in Abu Dhabi secured over 60% of this total, but a
number of gold, base metals and iron ore projects in Africa, South
America and Australia secured smaller amounts. Mining project
nance accounted for just 2.7% of global project nance closed
over 2013, according to Thomson Reuters.
29
Sitting outside of our syndicated loans data is the signicant
number of non-syndicated debt nancings that are funding project
development at the junior and mid-tier level. We explore these
further in our spotlight section, Alternative sources of nance.
29. Global project nance review, full year 2013. Thomson Reuters, January 2014.
IPOs
IPO volume reached a low of 26 across global exchanges the
lowest in at least a decade. A meager $0.8b of proceeds was
raised across the entire global IPO market, of which the largest
issue that of Chinalco Mining Corp at $410m accounted for
51%. Traditional sector hotspots Canada (the Toronto and TSX
Venture exchanges) and Australia were the hardest hit in volume
terms. Each hosted 7 IPOs, compared with a respective 42 and
28 in 2012.
Evidence of improved condence in the US and UK markets has
helped to drive something of an IPO recovery in others sectors,
with some large names coming to market, but the mining and
metals sector is likely to lag this recovery. In the absence of any
signals of stronger macroeconomic growth to support the sectors
fundamentals, risk aversion will prevail. Equally, in a time of
uncertainty and volatility, large-scale issuers have been reluctant
to time IPOs for fear of mispricing and poor after-market stock
performance. A number of IPOs were cancelled or postponed as
issuers pointed to weak demand and poor pricing conditions.
Of the 26 IPOs that were completed, just over one-third were
cross-border, with Toronto, London and Australia hosting junior
companies with operations in Switzerland, Sierra Leone and
Indonesia, respectively. Hong Kong hosted three of the largest
IPOs (Chinalco Mining Corp, Hengshi Mining Investments and CAA
Resources) that will see Chinese funds supporting the development
of base metals and iron ore projects in Peru, China and Malaysia
respectively. Cornerstone investors in 2013 IPOs included
commodity traders Tragura Beheer and Mercuria Energy Trading.
Proceeds Number
P
r
o
c
e
e
d
s

(
$
b
)
N
u
m
b
e
r

o
f

i
s
s
u
e
s
-
10
20
30
40
50
60
70
80
-
500
1,000
1,500
2,000
2,500
3,000
3,500
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Follow-on equity volume and proceeds (2007-2013)
Follow-on equity
Depressed share prices, particularly during the rst half of 2013,
made the issue of equity an untenable fundraising option for
most. A dramatic decline in the availability of risk capital for junior
companies offset a handful of large equity issues by producers,
resulting in a marginal 1% y-o-y increase in total
proceeds to $26b.
Early stage juniors unable to access the debt markets or secure
strategic investment resorted to small-scale offerings as a means
of staying aoat. Average proceeds raised by junior companies fell
to a monthly low of $1.5m in May, and an annual low of $5.9b from
1,832 issues. This represents an almost 50% fall on 2012s 2,073
issues and proceeds of $10.3b. Fifty-seven percent of all 2013
issues raised less than $1m.
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
-
5
10
15
20
25
280
117
70
177
141
86
26
Proceeds Number
P
r
o
c
e
e
d
s

(
$
b
)
IPO volume and proceeds (2007-2013)
Proceeds Average proceeds
P
r
o
c
e
e
d
s

(
$
m
)
A
v
e
r
a
g
e

p
r
o
c
e
e
d
s

(
$
m
)
-
200
400
600
800
1,000
1,200
1,400
-
1.0
2.0
3.0
4.0
5.0
6.0
J
a
n
-

1
2
A
p
r
-

1
2
J
u
l
-

1
2
O
c
t
-

1
2
O
c
t
-

1
3
J
a
n
-

1
3
A
p
r
-

1
3
J
u
l
-

1
3
Proceeds raised by junior companies (2012-2013)
However, overall equity proceeds were boosted by some signicant
equity raises at the top of the market. These included issues by
ArcelorMittal and Barrick Gold, which sought to deleverage balance
sheets in the face of challenging market conditions in the steel
and gold industries. Barrick Golds $3b bought-deal nancing in
November reportedly met with weak demand, illustrating that while
such a name could garner support, condence in the gold industry
is far from restored.
Follow-on activity also included state privatizations, such as the
partial stake sale of Steel Authority of India and of Russian diamond
producer, Alrosa. Both India and Russia have signaled their intent to
pursue further state divestments, targeting local exchanges to lure
local investors.
We enter 2014 with a more positive outlook: global economic condence is
improving, companies have taken action to deleverage balance sheets, and
the industry-wide focus on productivity and efciency is beginning to yield
discernible results.
Nonetheless, there is no escaping the prospect of further capital markets
volatility in 2014. US Federal Reserve policies regarding the tapering of
quantitative easing will cause short-term uncertainty and instability, with
a likely unsettling impact on global capital and commodities markets.
Similarly, the outlook for commodity prices is mixed, with many metals
remaining in near-term oversupply, which will continue to weigh on prices
in 2014. As supply and demand struggle to return to a post-supercycle
equilibrium, further price volatility will occur for at least the next two years.
This will see caution prevail and any uplift in M&A activity and improvement
of capital raising conditions will be gradual and require innovation in pricing
to tame volatility.
Conditions in the bond markets that have sided in favor of issuers for the
past three years are likely to tighten if global interest rates begin to rise.
Investing strengthening investment appraisal and
transaction execution
In 2013, most of the industry focused on reshaping its operational and
capital base and much has already been achieved. However, tighter
margins and the prospect of tightening credit options in 2014 will require
a continued focus on the need and opportunities for capital restructuring
and operational improvements. While S&P has a stable outlook for the
majority of its 182-strong universe of rated companies, a number of
groups (primarily thermal coal, gold and steel) remain at risk of rating
downgrades should market conditions deteriorate, or even fail to improve.
As such, we anticipate the possibility of further rescue rights issues
as companies seek to reduce gearing. With smaller companies having to
rely on shorter-term revolving credit facilities, this risk increases if loan
markets are not supportive of renancing in 2014.
Preserving reshaping the operational and capital base
While projects with near-term cash ows will continue to be developed,
companies will look for ways to reduce or phase capital expenditure in
an attempt to minimize risk and maximize returns potential. Companies
across the industry are likely to employ strategies that reduce upfront
capital outlays and introduce optionality through staged project
development, such as incremental capacity build.
M&A is likely to remain subdued in 2014, as the industry looks to
maximize returns by putting existing capital to better work. Portfolio
optimization, and therefore full or partial divestments, will continue to
be a focus but the valuation gap must rst be bridged. Deals that do
complete are likely to reect the following:
Deployment of expert-backed private capital allocated toward strategic
assets in the sector
Non-core divestments from gold companies, as well as from other
distressed segments of the industry, as the need to optimize capital
structures and portfolio increases
Acquisitions to diversify portfolios, minimizing commodity exposure
risk for example, thermal coal producers moving into metallurgical
coal and possibly even shale gas
Synergistic deals with a focus on
simplied portfolios that should
encourage shareholder support
for acquisitions that consolidate
competitive positioning
Continued vertical integration to manage
price volatility and supply security for
example, steel producers, Japanese and Chinese
copper smelters
Strategic joint ventures and junior consolidation, particularly
in gold and silver, as juniors seek means of minimizing upfront capital
costs, sharing risk and enhancing access to capital
Minority stake acquisitions by strategic buyers (family ofces, private
equity providers and venture capitalists) in promising, cash-strapped
juniors while valuations remain depressed
Conversely, growing condence in global equity markets, as witnessed in
the second half of 2013, should ultimately extend to the mining and metals
sector, which has lagged the broader recovery to date.
As a result, we expect to see an increased proportion of funding obtained
through equity as opposed to public debt markets. This will require
condence to return at the top of the industry, and some high prole
success stories among junior developers. Even then, the ow of equity to
the exploration sector may still be some way off.
With the next round of new supply projects being more technically complex
(for example, due to greater depths, lower grades, difcult metallurgy or
signicant infrastructure investment requirements), it is unlikely that even
the largest mining and metals companies will go it alone. Joint venturing
will return to its classic role or risk sharing. We would expect to see more
sell-downs of stakes in those mega projects to enable their funding and
development. It also indicates that the sector food chain will become more
active as smaller companies will need to sell to larger companies to raise the
necessary capital to move projects forward.
Outlook
The events of recent years, which culminated in the call for
leadership changes at the top of the industry, have driven home
the importance of cost discipline, productivity improvement
and a holistic approach to capital allocation. With
improved free cash ows, the burning platform
of non-core divestments to release cash has
largely been extinguished for the majors.
Instead, their focus will be on extracting
maximum value from their existing
portfolio of assets, through a relentless
focus on productivity and efciency
improvements.
However, across the industry, we
expect streamlining of portfolios
has further to go; it is likely to
manifest itself in additional
divestments to release cash,
Raising assessing future capital requirements and funding sources
Optimizing managing the portfolio of assets
Anticipation of key economic
triggers in 2014, particularly
around government stimulus
programs and interest rate rises,
is likely to create an unpredictable
and challenging capital raising
environment. Peaks of improved
condence, and, in turn, risk-seeking,
will be balanced by episodes of insecurity
and risk-aversion. This collectively presents
the risk of reduced demand and therefore
less-favorable terms for borrowers in 2014. We
are likely to see companies opportunistically access
the bond and loans markets early in the year to renance
ahead of any anticipated tightening.
For the mining and metals sector, we anticipate stronger equity
valuations at the top of the industry, as the focus on capital discipline
in 2013 begins to yield results. This should ultimately improve
sentiment, and in turn, funding conditions for the rest of the industry
in the equity markets. However, it may be too soon to see the return of
risk capital for early stage exploration.
Recovery is unlikely to be rapid and much of the junior sector will
continue to rely on alternative sources of nance, in an attempt
to avoid dilution for existing shareholders. Momentum will come
from options that have the effect of deferring the impact of
upfront development costs from equity-linked instruments such
as convertibles, to royalty and streaming deals. An increasing use
of small-scale M&A to nance projects is likely through strategic
partnering or mergers of equals at the junior level. Farm-ins may also
increase in popularity as a means of increasing options for juniors
without placing further strain on cash resources.
restore balance sheets and free-up management time to focus on
strategic priorities. Optimization efforts will also see a reallocation of
capital within portfolios, and even within single assets. Examples include
re-design of project plans and associated expenditures to reduce or
delay upfront capital outlay and partnerships to either share costs and
risks or bring in technical expertise, unlocking value sooner rather
than later.
As investors continue to challenge mining and metals companies
to improve returns and unlock balance-sheets for more productive
purposes (including share buybacks), we expect the increasing
occurrence of divestment of infrastructure assets to specialist investors.
We expect greater innovation in how infrastructure assets are funded.
In a softer commodity price environment which 2014 may prove to
be cost discipline will be critical as margins remain under pressure.
Given the additional need to achieve operational agility, we may see a
greater role for innovation and technology.
Growth of a different sort
There is little doubt that growth is back on the mining and metals agenda. A
total of 55% of the respondents to EYs Mining and Metals Capital Condence
Barometer released in November 2013 slated growth as their top priority.
However, what will be interesting to observe is how that growth is achieved.
The major producers are committed to a focus on improving free cash ow
and returns to be delivered through productivity improvements, recycling
of capital, major cost saving initiatives, new production coming online and
(now to a lesser degree) non-core divestments.
As our Window of opportunity analysis suggests, there are a number of
factors that will determine the timing of an industry-wide return to M&A.
As long as management remains primarily focused on improving ROCE, it
is unlikely that the majors will pursue large-scale acquisitions. Activity will
instead be driven by nancial investors looking to realize potential
upside not only from a longer-term recovery in commodity prices, but also
by utilizing their own in-house technical experience. Financial investors that
possess such expertise are able to exert operational, technical and nancial
inuence. With capital waiting to be deployed, investment activity by this
group is likely to be the most exciting story of 2014.
In addition, there is evidence of strong appetite from debt providers, with
increased competition among banks likely to improve access to leveraged
loans for quality mid-tier mining companies and developers. Without new
capital and new investment, the mining sector may well be sowing the seeds
for the next boom as supply falls short of demand. It is EYs view that a
more patient form of capital creation is essential for the long-term health of
the sector. This capital will be required to replace the hot money leaving
the sector, as short term returns fall from their record level, and to provide
capital for the next projects required to replace extinguishing supply or meet
future demand growth.
Commodity analysis
Aluminium
Coal
Copper
Gold
Iron ore
Nickel
Potash/phosphate
Silver/lead/zinc
Steel
Uranium
Prices tracked either near or below the marginal cost of production,
leading to a heightened focus on cost reduction as producers
sought to improve margins and remain cash positive. The three
major aluminium deals that completed in 2013, for example, were
all low-risk domestic consolidation deals:
1. Dubai Aluminium and Emirates Aluminium merged to form a
jointly held company Emirates Global Aluminium now the
fth largest aluminium company in the world. The $7.5b deal
combined the advantage of scale with low production costs to
create unique synergies for the newly formed company.
30
2. Sumitomo Light Metals Industries merged with Furukawa-Sky
Aluminium Corp in a deal worth $529m. The integration is
designed to accelerate global competitiveness and improve cost
positioning through synergies and economies of scale.
31
3. Chalco sold its aluminium fabrication interests to its parent
company Chinalco in a $529m transaction to optimize its
asset structure.
Despite continuing demand growth, structural oversupply and
growth in Chinese production capacity has underpinned historically
high levels of aluminium inventory, leading prices to remain
consistently below $2,000/t. In spite of the lower prices, with
much of this aluminium tied up in nancing deals (thereby limiting
physical supply), or subject to warehousing queues, premiums
remained elevated.
In an attempt to better manage aluminium inventory, the London
Metal Exchange (LME) introduced warehouse reforms (effective
April 2014) to accelerate the load-out of off-warrant aluminium.
However, these reforms have been opposed by aluminium
producers, who fear that a sudden inux of aluminium inventory will
30. Update 2 Aluminium merger hints at closer Dubai, Abu Dhabi ties, Reuters,
www.uk.reuters.com, 3 June 2013.
31. Furukawa-Sky, Sumitomo Light Metal to merge as competition rises, Bloomberg,
www.bloomberg.com/news, 29 August 2012.
further depress already low aluminium prices. In our view, such an
inux is unlikely while the aluminium market remains in contango
and interest rates remain subdued, driving strong returns from
inventory nancing.
Persistent high inventory levels, low prices and high energy costs
continue to challenge producers, despite some respite from higher
premiums. Continued margin compression, in combination with the
challenges above, has limited deal activity in the sector. Existing
industry players are intent on optimizing existing assets, while
there is little, if any, new money being attracted to the sector. For
example, Rio Tinto has chosen to reintegrate its Pacic Aluminium
business as it was unable to secure fair value in the prevailing
environment, while also announcing the closure of its Gove
alumina renery.
32
We expect limited aluminium deal activity throughout 2014, despite
the surfeit of assets available for sale. Buyers will require greater
clarity and transparency on four key matters before investing in the
sector the impact of the LME changes, the outcome of ongoing
industry restructuring efforts, the direction of the inventory
nancing market, and the success of Chinese efforts to curb
production. This is likely to limit deal making to consolidation plays
among existing producers.
At the same time, Indonesias ban on the export of bauxite
is expected to have a slow yet signicant impact on Chinese
aluminium producers. Whilst stockpiles have been built since the
ban was rst announced, the loss of a cheap source of bauxite is
expected to impact the competitiveness of Chinese smelters. In the
absence of a reversal of the Indonesian policy, Chinese producers
will be seeking alternate bauxite supplies, which may increase
interest in Australian and Guinean projects.
32. Rio Tinto cancels sale of its Pacic Aluminium division, American Metal Market,
16 August 2013, via Dow Jones Factiva.
Aluminium
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranium
60 Steel
2013 deal characteristics
There was a dearth of deal activity in the aluminium sector in 2013, given the prevailing
market conditions, with producers endeavoring to restructure their portfolios. Notably,
the standout deal that saw the emergence of Emirates Global Aluminium was a
consolidation play among existing industry participants.
Value of deals targeting aluminium by acquirer ($m)
7,538 United Arab Emirates
Japan
China
Australia
US
India
Other
1,019
529
485
282
178
97
Value of deals targeting aluminium by destination ($m)
7,500 United Arab Emirates
Japan
China
Australia
US
India
Other
1,019
529
485
282
178
135
2012 2013
Value ($m) 383 10,712
Volume 6 21
Cross border (% share of volume) 17 10
Value and volume of aluminium deals
Includes deals where aluminium is the target and/or acquirer commodity
The table above may include deals that are reported as mergers of equals. However, targets and acquirers are assigned for the purposes of analysis per ThomsonONE classications.
Top 5 aluminium deals (2013)
Value
($m)
Type Target name Target country Acquirer name Acquirer country Stake (%)
7,500 Domestic DUBAL (Dubai Aluminium Company) United Arab Emirates Emirates Aluminium Co (EMAL) United Arab Emirates 100
529 Domestic Sumitomo Light Metal Industries Japan Furukawa-Sky Aluminum Corp Japan 100
529 Domestic Chinalco Henan Aluminium China Aluminum Corp of China (Chinalco) China 87
490 Domestic Yunnan Metallurgical Group Co China China Life Insurance (Group) Co China 19
468 Domestic Alumina Australia CITIC Resources Australia Australia 14
Russias Evraz secured a controlling stake in Raspadskaya via its
purchase of a further 50% stake in Raspadskayas majority owner,
Corber Enterprises, to boost its self-sufciency in coking coal.
South Koreas POSCO bought out its partner, Cockatoo Coal, in the
Australian Hume coal project a high quality metallurgical coal
project. We also expect increased activity in India given the country
is short of both metallurgical and thermal coal, and needs to shore
up future supply to support its growing steel industry.
The thermal coal market has experienced lower prices due to
increased competition from emerging energy sources (e.g.,
shale gas). As a result, some companies are reassessing their
portfolios and looking to diversify into metallurgical coal or
other commodities. This shift in focus is more pronounced in
the US, where shale gas has had a signicant impact on thermal
coal deal activity. For example, Arch Coal sold its Utah thermal
coal operations to Bowie Resource Partners for $435m and is
considering divesting further assets to focus on its higher margin
metallurgical coal business. Other companies are expanding their
energy portfolios, such as Consol Energy, which plans to increase
its exposure in the Utica shale play in southeastern Ohio.
34
The large deals announced in the latter half of 2013 point to
improved M&A activity in the coming year. The ongoing focus
on productivity should drive deals which support this, as will
the industrys focus on achieving synergies via consolidation.
Steelmakers are expected to continue investing in coal as a means
of preserving already-squeezed margins and securing supply.
However, the thermal coal industry is expected to be the most
active in the coming year as companies either seek to rebalance
their portfolios or exit the industry, or as opportunistic players,
such as trading houses or private equity, make their entry. The
most recent example is Sherritt International announcing the sale
of its Prairie and Mountain coal mining operations for $435m to
Westmoreland Coal Company.
34. Consol Energy plans expansion in Utica shale region in US state of Ohio, IHS Global Insight Daily
Analysis, 17 October 2013, via Factiva. Copyright 2013, IHS Global Insight Limited.
Despite tough market conditions, the 2013 transaction market for
coal was not entirely unhealthy and showed some signs of emerging
from the slump. Positive indicators included the $1b sale of Rio
Tintos 50.1% interest in the Clermont joint venture to a company
jointly owned by Glencore Xstrata and Sumitomo Corporation,
announced in October. This deal conrms Glencore Xstratas
condence in the thermal coal market, with the company allocating
more than $4b to increase its coal output by over 20% by 2016.
33
In the US, the recent acquisition of Consolidation Coal by Murray
Energy from Consol Energy for $3.5b was another positive sign.
The acquisition allowed Murray Energy to secure low cost reliable
coal supply for its utility customers. The deal was reportedly subject
to a competitive bidding process, indicating renewed interest and
condence in US thermal coal.
The ongoing weakness in coal prices means companies are more
focused on productivity, streamlining portfolios and reducing costs.
Domestic consolidation remains a key trend in Australia, China and
Indonesia. In Australia, Whitehaven Coals purchase of the nal
29% in the Vickery South Coal Project for $30m, taking it to full
ownership, will allow it to strategically combine the project with an
adjacent project it already owns, reducing the development costs
for both. China Coal Energys $176m purchase of Shanxi Zhongxin
Tangshan Gou will increase its coal reserves.
Transaction activity slowed as the year progressed, with improved
free cash ow removing the urgency to dispose of assets. This
saw some assets being taken off the market, such as the Gregory
Crinum coal mine owned by BHP Billiton, which had not secured an
offer to match its targets.
As traditional acquirers in the sector, steelmakers remained active,
transacting to access metallurgical coal supplies to maintain
or boost self-sufciency levels. The current low valuations and
depressed margins made the timing opportune. For example,
33. Glencore Xstrata CEO bets big on coal as peers hold back, SNL Coal Report, 9 December 2013.
It was a challenging year for coal producers faced with continued weak coal prices and
ongoing cost pressures, resulting in consistent quarterly falls in deal volume. The deals
that did take place in 2013 suggest that the nature of divestment is changing from rapid
debt reduction to streamlining and refocusing the asset portfolio.
Coal
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranium
60 Steel
Value of deals targeting coal by destination ($m)
4,153
China
US
Australia
Russia
South Africa
Other
1,714
778
765
210
239
Value of deals targeting coal by acquirer ($m)
4,356 US
China
Australia
UK
New Zealand
Other
1,903
757
591
104
149
Value and volume of coal deals
2012 2013
Value ($m) 18,562 8,991
Volume 107 85
Includes deals where coal is the target and/or acquirer commodity
Top 5 coal deals (2013)
Value
($m)
3,462 Domestic Consolidation Coal Co US Murray Energy Corp US 100
1,077 Domestic Henan Dayou Energy Co China Investor Group China 26
733 Cross border Corber Enterprises Russia EVRAZ UK 50
435 Domestic Canyon Fuel Co US Bowie Resource Partners US 100
343 Domestic OCI Wyoming Co US Natural Resource Partners US 20
Copper deal volume and value witnessed a 13% and 30% drop,
respectively, y-o-y in 2013, when excluding the $8.55b foray by
Freeport-McMoRan Copper & Gold into the oil and gas space. While
2013 deal activity was down on 2012, copper was
still one of the most sought-after commodities, evidenced by
a couple of big value deals during the year. Stand-out copper
transactions included:
1. First Quantum Minerals $5.1b takeover of Inmet Mining
2. Capstone Minings $650m acquisition of BHP Billitons Pinto
Valley copper mine
3. China Molybdenums purchase of Rio Tintos Northparkes mine
for $820m
Deal activity was impacted by uncertainty in the copper market.
According to the International Copper Study Group,
35
the global
copper market registered decits between May (11,000 mt) and
July (151,000 mt). Nonetheless, the overall copper market
remains oversupplied with an expected surplus of around
180,000mt -200,000mt in 2013 and 250,000mt-300,000mt
in 2014.
This uncertainty, together with overall weakness in the mining and
metals industry, has impacted players across the industry. Industry
majors such as Rio Tinto and BHP Billiton are looking to sell their
non-core assets to optimize their portfolios and strengthen their
balance sheets. Mid-tier companies, such as Capstone Mining,
are taking advantage of the opportunity to acquire quality assets.
For example, BHP Billitons sale of its Pinto Valley copper mine in
Arizona for $650m to Capstone Mining was part of its non-core
asset divestment program, while Rio Tintos sale of its stake in
Northparkes copper mine in Australia reduced its debt burden.
36
However, continued weakness in the copper price brings increased
risks to these mid-tier companies in an environment of high cost
pressures. Baja Mining was forced to cede a majority stake in
the Boleo copper project in Mexico to a Korean consortium for
bailout funding, following large capital cost overruns. Mid-tier
companies are increasingly vulnerable to takeover bids at
lower-than-expected premiums.
35. Diversied Mining Weekly: Are Copper Oversupply Concerns Overblown?, BB&T Capital Markets,
28 October 2013.
36. Rio Tinto sells mine stake, The Wall Street Journal, online.wsj.com/news, 29 July 2013.
Accessed 18 December 2013.
Going forward, smaller companies are likely to pursue consolidation
as a means of managing escalating costs, lower realizations
and capital constraints. However, considering the strong, long-
term demand prospects, depressed valuations provide a good
opportunity for nancial investors to invest in copper.
We expect a number of trends to emerge in the year ahead. Delays
to major new supply coming on-stream, such as BHP Billitons $20b
Olympic Dam expansion, could stimulate market interest in juniors
who have near-term production potential. For mid-sized miners
and traders, there will be opportunities to achieve scalable growth
and diversication if they are either in a position to take advantage
of divestments by senior producers or can form partnerships with
them. Finally, one of the major deals expected to complete in
2014 is the sale of the Las Bambas copper mine in Peru by
Glencore Xstrata.
Copper producers are expected to press ahead with browneld
expansions despite escalating capital costs, given this can be
managed by releasing capital with the sale of stakes to strategic
investors such as Asian SOEs and trading houses. Also in Asia, it
is likely that Japanese and Chinese smelters will consider moving
toward backward integration in an attempt to achieve self-
sufciency in copper concentrate. There will also be the emergence
of frontier markets, such as Botswana and Mongolia, in addition to
traditional supply regions, such as Chile, as targets for access to
untapped copper-rich reserves.
Encouragingly for nancial investors, there is the promise of
investment upsides on the back of strong demand prospects in the
long-term, and the high incidence of copper supply disruptions.
Copper
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranium
60 Steel
While copper remains high on the list of many acquirers priorities, 2013 saw buyers
in the copper market opting to wait and see. Uncertainty, fueled by muted demand,
uctuating mine supply and softer prices, negatively impacted deal activity.
Value and volume of copper deals
2012 2013
Value ($m) 13,535 18,051
Volume 92 82
5,754
South Africa
Switzerland
Canada
China
South Korea
US
Other
1,145
936
430
170
319
111
Value of deals targeting copper by acquirer ($m) Value of deals targeting copper by destination ($m)
5,073
Australia
Canada
US
Democratic Republic of Congo
South Africa
Mexico
Other
1,089
936
430
653
357
327
Includes deals where copper is the target and/or acquirer commodity
Top 5 copper deals (2013)
Value
($m)
6,450 Domestic Plains Exploration & Production Co US Freeport-McMoRan Copper & Gold US 100
5,058 Domestic Inmet Mining Corp Canada First Quantum Minerals Canada 94
2,100 Domestic McMoRan Exploration Co US Freeport-McMoRan Copper & Gold US 64
820 Cross border Rio Tinto - Northeparkes Mine Australia China Molybdenum Co China 80
650 Cross border BHP Billiton - Pinto Valley US Capstone Mining Corp Canada 100
It was a subdued year for gold deals as major miners grappled with sharp falls in the
underlying gold price and looked within to improve cash ow from existing
operations 2013 was about protecting margins and reducing costs.
Appetite for M&A softened and price volatility reached new highs,
which fueled valuation uncertainty. As a result, majors found it
difcult to dispose of smaller high cost operations. Producers
focused on improving productivity and negotiating cost reductions
as a means of improving protability.
Cost overruns, production shortfalls and project delays, combined
with the signicant decline in gold prices, resulted in widespread
reporting of impairments by gold producers in 2013. Miners sought
to critically review their asset portfolios in an effort to improve
both their risk prole and appetite, as well as protect margins.
Notwithstanding, it is important to recognize there can be a
lag in implementing measures designed to counter lower prices
and margins.
Larger miners also focused on releasing capital through
divestments, where they could. For example, Barrick Gold disposed
of three of its Australian mines to Gold Fields.
37
The market expects
further non-core divestments from the majors in coming months,
such as the potential disposal of the Marigold gold mine by owners
Goldcorp and Barrick Gold.
38
The actions of a number of governments, as well as other
stakeholders, impacted investment decisions. Kinross Gold
announced the cessation of development of Fruta del Norte in
Ecuador following its failure to reach an agreement with the
Government of Ecuador over the economic and legal terms of
the projects development.
39
Such examples, in a risk-averse
environment, will inhibit inbound investment in resource-rich,
overly resource-nationalistic nations and impact future supply.
As with other commodities, nancial and private investors have
been showing an interest in the gold sector. The contraction of
capital from traditional nancing sources and the retreat of
major producers from signicant M&A activity are creating
opportunities for these investors to benet from the expected
upturn in the sector.
37. Gold Fields completes acquisition of Barricks Granny Smith, Lawlers and Darlot gold mines in
Western Australia, Gold Fields news release, 1 October 2013.
38. Goldcorp and Barrick reportedly selling Nevada mine, The Globe and Mail, 15 November 2013.
39. Kinross announces it will cease development of Fruta-del-norte, Kinross Gold news
release, 10 June 2013.
This is a trend we expect to continue, at least in the near-term. In
2013, 22% of acquirers of gold assets were nancial investors. In
particular, the junior players are looking for alternative sources of
nance from a broader base of capital providers, pointing to an
increase in the prominence of private capital.
Given the challenges of the past year, mining companies will need
to regain investor trust and reposition themselves before they
begin seeking out M&A opportunities. This provides the market with
some expectation of growth-driven M&A activity in 2014. Those
players who are looking to take advantage of todays low company
valuations to generate longer-term nancial returns will dominate
the market. The market reacted well to Goldcorps $2.6b hostile
bid for rival Osisko Mining, announced in January 2014.
40
This
could signal that industry valuations have fallen to a level where it
makes sense for some mining companies to make acquisitions, and
disciplined transaction pricing will set the sector for a healthy level
of condence. However, given the uncertainty of the near-term
pricing environment, valuations and transaction negotiations are
likely to remain a challenge.
Despite the uncertain outlook for the year ahead, more strategic
JVs and consolidation activity are likely as smaller companies look
for ways to minimize project risk and improve access to capital,
said Jay Patel, Canadian Mining and Metals Transactions
Leader, EY.
With Chinese demand for gold rising even surpassing India
recently
41
we expect Chinese mining companies and SOEs to
pursue domestic and overseas acquisitions, with many deals in the
pipeline. Such activity is key to growing reserves, securing supply
and increasing international footprints,
42
and apt for Chinese
private capital investors to acquire strategic stakes for investment
purposes.
40. Goldcorp announces offer to acquire Osisko for C$5.95 per share in cash and shares, Goldcorp
news release, 13 January 2014.
41. Gold demand trends: Q3 2013, World Gold Council, November 2013.
42. China gold mine deals at record after price plunge: commodities, Bloomberg, 21 August 2013.
Gold
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranium
60 Steel
Value of deals targeting gold by destination ($m)
4,276 Russia
China
Canada
Australia
Philippines
Kazakhstan
South Africa
Other
1,608
1,454
1,368
1,105
178
444
1,517
Value of deals targeting gold by acquirer ($m)
4,053 Russia
China
Canada
Australia
US
UK
South Africa
Other
2,367
1,706
892
852
302
568
1,211
Value and volume of gold deals
2012 2013
Value ($m) 14,638 12,363
Volume 384 292
Cross border (% ) 55 47
Includes deals where gold is the target and/or acquirer commodity
Top 5 gold deals (2013)
Value
($m)
3,620 Domestic Polyus Gold International Russia Lizarazu and Receza Russia 38
1,105 Cross border CGA Mining Philippines B2Gold Corp Canada 100
823 Domestic Shandong Jinshi Mining Co China Shandong Gold Mining Co China 75
764 Cross border Aurizon Mines Canada Hecla Mining Co US 100
553 Domestic Gansu Daye Geological Mining China Zhejiang Gangtai Holding (Group) Co China 100
While volatile iron ore prices meant iron ore deal values in 2013
were well down on 2012, there was a gradual improvement in
prices as the year went on. The uncertain environment made
deal execution particularly difcult, especially for larger deals, as
evidenced by Hanlong Minings aborted $1.2b bid for Sundance
Resources.
43
The combination of an ambiguous environment
and a high degree of market caution meant deal values were
historically low, averaging a mere $225m, with only three deals
exceeding $500m.
The largest deal was Sesa Goas $3.9b purchase of Sterlite
Industries, which was motivated by a desire for greater synergies
through the achievement of lower operating costs and a healthier
balance sheet for the combined group.
44
This deal in particular
highlights the current focus of iron ore miners on optimizing the
supply chain in volume and cost terms to better manage volatility.
Iron ore producers are also increasingly focused on productivity
and improving existing operations, adding incremental tonnes
from efciency as opposed to expansion. This is driving a focus
on streamlining portfolios to optimize existing assets. While this
remains the mantra of the larger miners, there will only be carefully
considered M&A activity outside of divestments of non-core
scalable assets. A constraint on dealmaking by the larger players
is both shareholder and market pressure on management, many
of whom are new in the role. This fresh intake is acutely aware of
the pressure to generate short-term shareholder returns, against
investing in medium to long term growth, and understand that any
deployment of capital will be heavily scrutinized by all involved.
With these factors in play, coupled with lower valuations and more
stable iron ore prices, the market looks attractive. Trading houses
43. Hanlong Mining Investment Pty Ltd bid for Sundance Resources Limited (81.4% Stake)
Deal:315633, Mergermarket, updated 8 April 2013.
44. Sesa Goa Limited bid for Sterlite Industries (India) Limited Deal: 354387, Mergermarket,
updated 17 August 2013.
are increasing their exposure to iron ore, with Chinese trading
companies being particularly active, the largest deal being General
Nice Developments $204m purchase of Russias IRC. Ongoing deal
activity from these players is likely as they continue to seek supply
to meet growing Asian demand.
The need to secure future raw material supply also saw steelmakers
remaining active buyers of iron ore in 2013, including Evrazs
$158m purchase of a 51% stake in GMK Timir, a joint venture
created for the development of iron ore deposits. This activity will
continue as China and India, which are structurally short of quality
iron ore, need to secure substantial future supply.
The way the deals are done, however, may start to change subtly.
Market observers see Chinese companies particularly keen to be
involved in collaboration deals as opposed to outright purchases. It
is our view that stake purchases and investment in infrastructure to
gain off-take will become more common.
Iron ore M&A will increase in 2014, albeit at a subdued pace.
Lower valuations of mine assets will bring new entrants seeking to
diversify investments. As with other commodities, miners will be
reviewing their portfolios and assessing risks and efciencies. A key
area of potential assessment could be infrastructure assets. While
miners will wish to retain control of their routes to market, sales of
stakes in infrastructure will allow sharing of expenses and risks, as
well as enabling them to focus on their mining assets. For example,
Vales recent sale of stakes in its logistics unit will see it retain
control but reduce exposure and therefore allow a greater focus on
its iron ore division.
Iron ore
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranium
60 Steel
With the majors increasingly looking to share risks and manage costs through
co-investing and developing partnerships, we expect this to shape M&A activity in
the year ahead.
Value of deals targeting iron ore by destination ($m)
1,118
Brazil
Canada
Russia
Cameroon
China
Other
736
699
412
117
242
Value of deals targeting iron ore by acquirer ($m)
1,327
South Korea
China
Russia
UK
United Arab Emirates
Switzerland
Other
1,109
266
178
226
80
138
Value and volume of iron ore deals
2012 2013
Value ($m) 7,354 7,420
Volume 65 33
Includes deals where iron ore is the target and/or acquirer commodity
Top 5 iron ore deals (2013)
Value
($m)
3,911 Domestic Sterlite Industries (India) India Sesa Goa India 100
1,109 Cross border ArcelorMittal Mines Canada Canada POSCO; China Steel; EQ-Partners South Korea 15
593 Domestic Baotou Iron & Steel Group China Inner Mongolia Baotou Steel China 100
390 Cross border Sul Americana de Metais Brazil Honbridge Holdings China 100
266 Cross border Anglo American - Amapa Project Brazil Zamin Ferrous United Arab Emirates 100
consumption. Chinese construction sector growth is slowing down
and is expected to moderate over the coming quarters, which,
given the steel sensitive nature of the industry, will lead to a notable
impact on rened nickel consumption.
47
Chinese stainless steel
demand is also slowing.
As a result, demand supply projections indicate that the nickel
market will remain in surplus, placing continued pressure on
prices. However, some investors believe that the export ban
implemented by the Indonesian Government in January 2014,
with temporary exemption to two companies Freeport-McMoRan
Copper & Gold and Newmont Mining could reduce nickel supply
and support prices.
The subdued price outlook, combined with escalating costs and
capital constraints, are likely to lead to consolidation in the nickel
industry. If major producers decide to divest their assets then there
will be an acquisition opportunity for those stainless steel producers
planning to establish integrated businesses as a means of managing
price risk. It is also likely that Chinese players could emerge
as strategic buyers to support the nations large and growing
requirement of nickel, in line with its steel sector.
47. Industry Forecast - Nickel: Growth To Slow As Economy Rebalances, Business Monitor Online,
accessed 9 September 2012. Copyright 2014 Business Monitor International Ltd.
Nickel
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranium
60 Steel
Crispian Investments $1.5b minority stake acquisition in Norilsk
Nickel was the only major nickel deal in 2013. This deal was part of
an agreement between Interros, Millhouse and UC Rusal to settle
their shareholding dispute.
Poor trading conditions in the stainless steel sector in Europe and
China had a negative impact on the nickel sector. Furthermore,
the continuous increase in nickel supply through large nickel pig
iron (NPI) capacity additions and new project ramp-ups, such as
the Wedgetail and Honeymoon projects of Norilsk Nickel, placed
additional pressure on nickel prices.
Nickel producers are formulating various strategies to address
falling returns and cost acceleration due to project delays, ranging
from production cuts and divestment of assets to permanent
closure of operations. Norilsk Nickel, the largest global nickel
producer, has unveiled a new strategy to focus on capital discipline
and returns on investments: all production assets in the companys
portfolio must meet dened Tier 1 asset criteria by 2015.
46
Growth in the Chinese economy will remain the major determining
factor for the nickel market in the medium- to long-term. This
means that over the next few years, there will be downward
pressure on the rened nickel industry as the Chinese economy
rebalances away from infrastructure investment toward private
46. Norilsk Nickel unveils new strategy focused on Tier 1 assets and higher returns, Norilsk Nickel,
http://www.nornik.ru/_upload/editor_les/le2227.pdf, accessed 15 November 2013.
With current prices pushing 40% of nickel producers below protability,
45
lackluster
trading conditions in stainless steel and an oversupply of nickel, it is of little surprise
that M&A was not popular in 2013.
45. Australian nickel miners - emerging from the darkness, Macquarie equities
research, 8 October 2013.
Value of deals targeting nickel by acquirer ($m)
1,487 Russia
Philippines
Canada
China
Australia
19
7
7
5
Value of deals targeting nickel by destination ($m)
1,487 Russia
Philippines
Australia
Canada
Other
19
7
7
5
Value and volume of nickel deals
2012 2013
Value ($m) 433 1,541
Volume 29 13
Includes deals where nickel is the target and/or acquirer commodity
Top 5 nickel deals (2013)
Value
($m)
1,487 Domestic GMK Noril'skiy Nikel' (Norilsk Nickel) Russia Crispian Investments Russia 6
15 Domestic Superkolong South Africa IT243 Pty (EMU Nickel and El Nino
Mining)
South Africa 100
11 Domestic Toledo Mining Corp Philippines DMCI Mining Corp Philippines 27
8 Domestic Toledo Mining Corp Philippines DMCI Mining Corp Philippines 21
7 Domestic Dinty Lake Nickel Project Canada Unity Energy Corp Canada 100
However, compared with other commodities, deal activity in the
potash/phosphate sector improved in 2013 on a y-o-y basis. Deal
value increased as nancial investors continued to invest in potash.
For example, stake acquisitions in Uralkali by Onexim Group and
Chengdong Investment Corp for $3.5b and $2b, respectively, were
the largest deals of the year.
Also among the largest deals was Phosagros $190m increase
in its existing stake in Apatit to support its growth strategy and
consolidate through its subsidiaries. Other transactions in the
sector were also largely motivated by consolidation, although the
purchase of 20% of Karnalyte Resources by state-owned enterprise
Gujurat State Fertilisers was a move to shore up future supply.
Interestingly, both Eurochem and Belaruskali made partial stake
acquisitions of marine port facilities in 2013, reecting their long-
term strategic growth interests to expand their exporting capability.
The dissolution of the joint venture formed by Uralkali and
Belaruskali is likely to have a large impact on the potash/phosphate
market and future deal activity. Along with Canadas Canpotex,
the organization controlled about 70% of global traded potash
volume.
48
With increased competition, we expect the industry to
move toward a deregulated potash pricing format.
48. Potash cartel break-up: implications for the farmer, Macquarie Research, 31 July 2013,
via ThomsonONE.
This could pose serious threats for the survival of marginal
producers, as major players with lower production costs scale up
their existing capacities. On the other hand, it could also create an
opportunity for increased M&A activity as larger existing players
seek greater control, increase their stakes in marginal resources
and exploit efciencies to consolidate their position.
The medium-term forecast for the potash/phosphate market is
one of surplus, despite a demand recovery from China. In addition,
nations such as India and Brazil will be the main acquirers of
potash/phosphate resources in coming years as they are the main
consumers of fertilizer ingredients. However, looking beyond this,
the dynamics of the industry could undergo a serious change
as efforts to maintain higher prices - by matching supply with
demand - are overtaken by boosting capacity utilization to supply
more at lower prices.
We expect this to result in a number of outcomes: it will not only
provide an edge to the larger, low cost marginal producers, but also
pave the way for competitive pricing dynamics, while encouraging
cost efciencies through strategic acquisition.
Potash/phosphate
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranaium
60 Steel
Oversupply and competition issues, in the face of waning demand from major importers,
resulted in consistently declining prices during the year. Further, with an outlook of
continued greeneld project expansion by Eurochem, BHP Billiton and Sirius Minerals,
there could be even greater pressure on short-term fundamentals going forward.
Value of deals targeting potash/phosphate by destination ($m)
5,796 Russia
Canada
Brazil
Namibia
Australia
Other
76
36
27
24
8
Value of deals targeting potash/phosphate by acquirer ($m)
3,796
China
Russia
India
Brazil
Oman
Australia
Other
2,031
46
36
27
24
8
Value and volume of potash/phosphate deals
2012 2013
Value ($m) 3,124 6,096
Volume 23 18
Includes deals where potash/phosphate is the target and/or acquirer commodity
Top 5 potash/phosphate deals (2013)
Value
($m)
3,543 Domestic Uralkali Russia Onexim Group Russia 22
2,000 Cross border Uralkali Russia Chengdong Investment Corp China 13
190 Domestic Apatit Russia PhosAgro Russia 13
98 Domestic MMTP Russia MKHK YevroKhim Russia 48
63 Domestic Apatit Russia PhosAgro Russia 1
In 2013, the value of deals dropped fractionally by 1% to $4b,
with a single zinc megadeal accounting for 41% of overall deal
value. Volume dropped by 42%. With the imminent closure of a
number of large zinc and lead mines, the market is expected to
soon experience a supply decit. This, together with junior silver
miners seeking investment partners in the capital-constrained
environment, suggests a positive outlook for M&A activity in silver/
lead/zinc assets in 2014.
The largest deal of 2013 was the acquisition of a 30% stake in
Kazzinc by Samruk-Kazyna, Kazakhstans wealth fund, in a deal
worth $1.65b. The stake acquired, although non-controlling, is a
strategic one for the Kazakhstan Government, giving it security
and control over domestic resources. Deals completed in the silver
sector in 2013 were about expansion, with acquirers looking to
form a stronger, low-cost precious metals asset base and tap into
potential exploration and pre-development projects. Such deals
included silver miner Hecla Minings $764m acquisition of gold
company Aurizon Mines, and gold miner Coeur dAlene Mines
$269m acquisition of Orko Silver.
The outlook for zinc and lead mine supply remains weak, with
a number of large zinc mines expected to either close or curtail
production by 2016. This includes Glencore Xstratas Brunswick
Mine in Canada, Minmetals Century Mine in Australia and Vedanta
Resources Lisheen Mine in Ireland. This will remove approximately
15% of global zinc supply, which currently stands at 2.1m tonnes.
Further, given the recent environment of capex reductions and
depressed prices of zinc, new mine development has been on the
backburner. We also expect there to be a decreasing interest in
silver as a hedge against ination as governments move away from
monetary easing and stimulus measures.
The return of strong fundamentals is expected to drive the price
of zinc and lead up, which will act as a catalyst for M&A activity.
Additionally, junior silver miners will be on the lookout for strategic
deals to minimize project risk and improve access to capital.
Silver/lead/zinc
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranium
60 Steel
Improving zinc market fundamentals, coupled with silver junior miners need for
investment partners, is expected to lead to increased M&A activity in 2014.
Value of deals targeting silver/lead/zinc by destination ($m)
1,650 Kazakhstan
China
Mexico
Other
813
354
21
Value of deals targeting silver/lead/zinc by acquirer ($m)
1,650 Kazakhstan
China
US
Other
810
269
Canada 85
24
Value and volume of silver/lead/zinc deals
2012 2013
Value ($m) 4,057 4,007
Volume 62 36
Includes deals where silver, lead or zinc is the target and/or acquirer commodity
Top 5 silver/lead/zinc deals (2013)
Value
($m)
1,650 Domestic Kazzinc Kazakhstan Samruk-Kazyna Kazakhstan 30
764 Cross border Aurizon Mines Canada Hecla Mining Co US 100
371 Domestic Inner Mongolia Yulong Mining China Science City Development Public Co China 69
269 Cross border Orko Silver Corp Mexico Coeur d'Alene Mines Corp US 100
199 Domestic Orion Minerals Kazakhstan Kazzinc; Verny Capital Kazakhstan 100
Steelmakers continued to experience signicant pressure on prots
during 2013 due to a combination of excess capacity and slowing
demand as a result of continued weak economic fundamentals. It
is, therefore, no surprise that M&A activity declined substantially
in 2013, both in value and volume. In 2012, the $9.4b merger of
Nippon Steel and Sumitomo Metals substantially inated the value
of steel deals to $27.5b, with deal value in 2013 declining by 62%
to $10.5b by comparison. In 2012, there were six deals worth over
$1b in the steel sector compared with just two in 2013: Hyundai
Steels acquisition of the cold-rolled steel business of Hyundai Hysco
and ArcelorMittals sale of 15% of its Canadian iron ore mine.
Global economic recovery is needed to stimulate demand but
before there can be any long-term structural growth in the steel
industry, overcapacity has to be addressed. In a move to do just
that, the Chinese Government issued new guidelines in 2013 to
reduce excess capacity in certain basic industries. While there has
been some removal of older capacity in Chinas Hebei Province, it
remains to be seen whether these guidelines will result in a policy
for sustainable restructuring of the Chinese steel sector.
There was signicant transaction activity in China in 2013,
representing 28% or $1.7b of the $5.9b total value of worldwide
transactions targeting steel. The top four deals in China were
largely aimed at restructuring existing steel companies:
1. Baoshan Iron & Steel acquired Baosteel Zhanjiang Iron & Steel
for $797m to transfer production out of Shanghai to coastal
regions. This was in honor of an agreement it signed with the
Shanghai Municipal Government to reduce steel production by
6.6m tonnes by 2017.
2. Wuhan Iron and Steel Group Corporation integrated its Hong
Kong-based holding company (comprising its seven mining
subsidiaries) into its listed entity, Wuhan Iron and Steel Company
Ltd, to reduce its operating costs and enhance its market
competitiveness.
3. Jiuquan Iron and Steel Group (JISCO) incorporated JISCO
Tianfeng Stainless Steel, its unlisted subsidiary, into another of
its subsidiaries, JISCO Hongxing Iron and Steel, in a deal worth
$729m. This restructure will see all of JISCOs steel businesses
with a listed status.
4. In a move to restructure assets, the Shanghai-listed arm, Inner
Mongolia Baotou Steel Union acquired iron ore assets from
parent company Baotou Iron & Steel Group for $593m.
As volatile raw material prices for iron ore, metallurgical coal
and scrap steel continue to exert signicant pressure on steel
margins, vertical integration remains a trend in the sector. This was
evidenced by a couple of large deals in upstream mining assets.
The largest was the $1b purchase of a 15% stake in ArcelorMittals
Canadian iron ore mines by POSCO and China Steel, which also
delivered them secure long-term off-take agreements proportionate
to their shares. ArcelorMittal sold its stake mainly to pay off debt
and also to extend its Liberian iron ore assets. In another big
raw materials deal, Evraz increase its stake in Russian coking
coal producer Raspadskaya to 82%, via its $733m acquisition
of a further 50% stake in Raspadskayas majority owner, Corber
Enterprises.
We are, however, increasingly seeing a balancing act between
steelmakers either vertically investing capital upstream into
mines or investing it into downstream operations so as to
optimize products, increase margins, and gain greater traction
with their customers. In light of lower protability across the
sector, steelmakers also have to ensure they can service their debt
on lower EBITDA margins, with the European steel sector being
particularly hard hit.
For this reason, ThyssenKrupp wants to limit its exposure to the
steel sector its net debt at the end of September stood at $6.8b
(twice its equity)
49
and has been moving into higher margin
goods and services. In December 2013, it nally agreed a deal
with ArcelorMittal and Nippon Steel & Sumitomo Metal Corporation
(NSSMC) to sell its Steel America assets in Alabama for $1.6b.
This gives ArcelorMittal and NSSMC greater market share in the
US auto sector. Similarly, in the largest deal this year, Hyundai
Steel acquired the cold-rolling steel business of Hyundai Hysco in
December for $2.6b. This new integrated structure will help the
companies to sell auto sheet to their afliate company Hyundai
Motor Group, which enjoys an 80% share of the Korean domestic
auto market.
An emerging trend is steelmakers seeking out joint ventures or off-
take agreements with miners. For example, Tata Steel Canada paid
$30m to acquire a 51% participating interest in Labrador Iron
49. ThyssenKrupp chief tests shareholder patience on steelmaker overhaul, Reuters,
12 January 2014.
Steel
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranaium
60 Steel
Pressure on the steel sector did not ease in 2013. The main drivers of transactions were
consolidation in China and vertical integration, with few deals done and a commensurate
sharp drop in value.
Value of deals targeting steel by destination ($m)
2,842
US
South Korea
1,657 China
Japan
India
Other
524
346
233
309
Value of deals targeting steel by acquirer ( $m)
2,842
Japan
South Korea
1,657 China
India
Other
871
233
309
Mines Howse deposit. There has also been some downstream joint
venture activity to enable steelmakers to access new markets.
Nippon Steel and Sumitomo Metal Corp (NSSMC) paid $540m to
secure a 50/50 joint venture with Australian steelmaker BlueScope.
The joint venture company hopes to expand its product offering, as
well as its footprint across Asia.
The outlook for the steel sector in 2014 remains cautiously
optimistic as economic fundamentals steadily improve. Chinese
steelmakers will become more responsive to the market in light of
new economic reforms to reduce excess steel capacity. This is likely
to prompt increased consolidation in the sector. Excess capacity is
an issue for the global sector and until it is addressed, protability
will remain an issue.
Vertical integration into iron ore may not be as attractive in light
of the increased supply on the market and forecast reduction or
stabilization in iron ore prices. With limited availability of capital,
steelmakers will be focusing on debt reduction and optimization
of their existing operations. Larger steelmakers will also be
seeking out acquisitions that will move them closer to high growth
sectors - for example, ArcelorMittals and NSSMCs acquisition of
ThyssenKrupps North American operations to gain traction in the
automotive sector.
Value and volume of steel deals
2012 2013
Value ($m) 27,480 10,546
Volume 47 39
Includes deals where steel is the target and/or acquirer commodity
Top 5 steel deals (2013)
Value
($m)
2,616 Domestic Hyundai Hysco - Steel milling business South Korea Hyundai Steel Co South Korea 100
1,109 Cross border ArcelorMittal Mines Canada Canada POSCO; China Steel; EQ-Partners South Korea 15
797 Domestic Baosteel Zhanjiang Iron & Steel China Baoshan Iron & Steel Co China 72
737 Domestic WISCO International Resources
Development & Investment
China Wuhan Iron and Steel Company China 100
733 Cross border Corber Enterprises Russia EVRAZ UK 50
The uranium industry has been reeling under acutely weak prices
due to oversupply, uncertain demand and slower-than-expected
reactor restarts in Japan. This instability understandably resulted
in an unfavorable environment for M&A in 2013. Excluding the
years largest deal the acquisition of Kazakhstans Uranium
One by Russias ARMZ Canada enjoyed the most activity, with
juniors driving domestic activity via consolidation aimed at taking
advantage of low valuations, while nancial rms acquired
equity stakes.
The subdued deal activity in uranium can be attributed to the
uncertainty surrounding its short- to medium-term outlook. Japan
has about 40kt of uranium inventory, representing around 56% of
the countrys annual demand, but it currently does not have an
operational reactor: the rst reactor is slated to come back online
in mid-2014. As a result, there is very little demand from uranium
buyers to support prices. The situation in Japan is compounded
by abundant near-term global uranium supply about 19k
tonnes excess supply during 2013
50
along with continued
demand uncertainty.
Reassuringly, there is a brighter outlook for the rst half of 2014.
Power companies are expected to recommence buying activity
and this might support uranium spot prices, although prices are
expected to remain below $40 per pound in 1Q 2014.
51
Long-term
demand for uranium is still expected to be strong, with proposed
nuclear power reactors to be established in China (171), India (56),
Russia (41) and the US (26), while Japan is expected to restart
its reactors. China is set to become the worlds largest nuclear
generator in the next decade, with plans to increase nuclear
capacity to 70GWe80GWe by 2020, compared with the current
50. Uranium Update, Byron Capital Markets, 17 September 2013.
51. Uranium Update, Byron Capital Markets, 17 September 2013.
12GWe.
52
These emerging countries, together with Japan, will
increasingly be looking to secure uranium supplies through
vertical integration. A case in point is the 2012 acquisition of
Australian mining company Extract Resources by China Guangdong
Nuclear Power Group and the China-Africa Development Fund for
$2.3b, giving them access to the worlds fourth-largest deposit of
uranium, in Namibia.
53
Looking ahead, uranium demand is expected to improve slightly
but remain weak overall. This will see producers continue to cut
both production and costs. In this environment, companies are
unlikely to plan new investments or substantially increase their
exposure to uranium.
Certain companies are investing in non-uranium assets to diversify
their commodity portfolio. This could result in investment ows
out of the uranium industry into related or unrelated assets. On
the other hand, existing stakeholders may see the market
weakness as an opportunity to increase their stakes due to lower
valuations, which would be welcomed by cash-constrained junior
mining ventures.
Once the market has greater clarity around Chinese demand and
the timing of Japanese reactor restarts, this should trigger a ow of
investments into the industry and renew interest in large projects,
such as Camecos Kintyre.
Finally, one of the biggest uranium transactions expected to
complete in 2014 is the divestment of the UK Governments stake
in Urenco, which has an estimated value of $13b. These factors
point toward a more buoyant outlook for M&A activity in the
year ahead, albeit tempered by the ongoing pressure on prices
and demand.
52. Uranium Sector Review, Resource Capital Research, 10 September 2012, via ThomsonONE.
53. China digs deep for uranium to meet its rising energy demands,
Business Standard, 17 July 2013.
Uranium
48 Copper
44 Aluminium
46 Coal
50 Gold
52 Iron ore
54 Nickel
56 Potash/phosphate
58 Silver/lead/zinc
62 Uranium
60 Steel
In an exceptionally challenging year, both the value and volume of deals registered a steep
year-on-year fall, with deal value dropping to just $2b and only 33 deals completed.
1,347 Russia
Canada
Other
473
52
Value of deals targeting uranium by acquirer ($m) Value of deals targeting uranium by destination ($m)
1,347 Kazakhstan
Canada
Australia
Sweden
Other
334
115
58
18
Value and volume of uranium deals
2012 2013
Value ($m) 3,917 2,028
Volume 43 33
Includes deals where uranium is the target and/or acquirer commodity
Top 5 uranium deals (2013)
Value
($m)
1,347 Cross border Uranium One Kazakhstan ARMZ Russia 48
215 Domestic Alpha Minerals Canada Fission Uranium Corp Canada 100
140 Cross border NUKEM Germany Cameco Corp Canada 100
78 Cross border Avocet Resources Australia Lion One Metals Canada 100
66 Domestic Fission Energy Corp Canada Denison Mines Corp Canada 100
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