Cash was exchanging hands in record amounts in the first half of 2011, but mining industry analysts say the rest of the year might not be so rosy.
Earlier this month, PwC released a new report that pointed to a slowdown in global mining mergers and acquisitions (M&A) in the second half of the year.
John Nyholt, PwC’s national leader of transaction services, told Business in Vancouver the drop off in corporate transactions began immediately after the end of the first half.
In fact, PwC said, on aggregate, deal values and volumes were down 49% and 25% respectively in July and August.
“That’s pretty significant,” said Nyholt. “And the primary driver of that slowdown we believe is the rather fractured markets that we’ve seen in terms of global economic markets.”
He explained that ongoing debt concerns in Europe and the U.S., plus fears in Canada about an economic slowdown, have triggered a new wave of volatility in public markets that have caused investors to back away from deal-making.
“All of these things end up creating additional uncertainty in the marketplace, and that makes it less likely companies are going to move forward on the M&A front,” he said. “The mining sector is probably more [focused on] big bets, and you want some of those fundamentals to be in better shape before you make some of those big bets.”
Still, Ernst & Young’s (E&Y) Canadian mining leader Tom Whelan said things aren’t all bad in the Canadian mining sector.
In fact, Canada led the world in acquisitions (196) in the first half of the year, and was also the leading target destination (129 deals).
Whelan said although there were fewer deals in the first half of the year compared with 2010, the dollar value of deals was larger.
The total value of global mining transactions from January to June more than doubled this year to US$96.3 billion compared with US$47.9 billion last year.
Whelan said the increase in deals focused on safe mining jurisdictions such as Canada is likely a result of investors increasingly concerned about operations in developing nations.
“2011 saw a return to deals in lower-risk jurisdictions, which is why Canada topped the list,” said Whelan. “And that I think also speaks to the risk appetite that’s out there as people are obviously worried about what’s going on in the global economy.”
Last week, E&Y said resource nationalism topped its annual list of risks for miners.
“In the last four months, 25 jurisdictions around the world have introduced some form of additional taxation or royalty, and if you’re uncertain about what kind of tax regime you’re going into, naturally, you’re going to be a little more cautious about pulling the trigger on a transaction,” Whelan said.
Still, the increase in risk-aversion in the sector could be good news for Vancouver’s throng of junior mining companies.
Nyholt said large mining companies might increasingly target junior companies as potential takeover targets because the deals are smaller and don’t necessarily come with a heap of risk.
“Junior stage companies are always good marks for being swallowed up by larger companies,” Nyholt said.
And even though the markets might cool off, he doesn’t believe the boom in mining transactions has come to a screeching halt.
“With increasing demand from China and some of the more significantly developing countries like India and Brazil, that is going to fuel further demand for minerals, and more demand for the commodity typically leads to more acquisitions.” •
