While other sectors continue to flounder amid an uncertain economic recovery, merger and acquisition activity in the Canadian mining scene has roared back to life.
That’s good news for Vancouver’s business sector, which is known to be a global mining hub.
“No other global sector has seen such a consistently high volume of deal-making,” said John Nyholt, PricewaterhouseCoopers’ (PwC) national leader of transaction services.
The financial firm said there had been 1,324 mining deals announced by August 15 around the world worth an aggregate US$104 billion.
Canadian companies, the report said, are the most active acquirers.
According to an Ernst & Young (E&Y) report, the value of deals signed in the first half of 2010 was up 46% compared with the same period last year and the volume of deals increased 20%.
That report also said Canada had moved to first place as the preferred destination for deal-making.
The primary driver behind the deal-making frenzy may be a bullish commodity market, which saw gold prices hit an all-time high of $1,289 per ounce September 21.
PwC said 40% of all acquisition targets in 2010’s first half had a major interest in gold.
Vancouver has been the site of several major gold deals recently, including Kinross Gold Corp.’s (TSK:K) $7.1 billion takeover of Red Back Mining Inc. (TSX:RBI) and Goldcorp Inc.’s (TSX:G) $3.6 billion deal to snap up Andean Resources Ltd. (TSX:AND).
Yet silver, copper, iron ore and coal continue to grab investor attention as well.
Earlier this year, Vancouver copper player Quadra Mining merged with FNX Mining to form Quadra FNX Mining Ltd. (TSX:QUX) in a stock-swap deal valued at $1.5 billion.
Nyholt said much of the run-up in commodity prices has been led by emerging economies in Asia that appear hungry for nearly any commodity that’s mined.
That’s created a swell of deals in strategic commodities such as fertilizer, rare earth elements and lithium.
The big story in the Canadian mining scene so far this year has been BHP Billiton Ltd.’s (NYSE:BHP) $39 billion bid for Saskatchewan-based fertilizer giant Potash Corp. (TSX:POT), but Vancouver has seen some notable strategic deals of its own.
In June, Lithium One Inc. (TSX-V:LI) signed a deal with state-owned Korea Resources Corp. to fund the development of its Sal de Vida brine project.
In August, Vancouver’s Salares Lithium Inc. (TSXV: LIT) agreed to a merger with Talison Minerals Pty Ltd., the world’s largest lithium producer.
Nyholt said demand for lithium and rare earth elements in high-tech gadgetry would continue to drive merger and acquisition activity.
“With the greening economy and battery use and electric cars … those are going to be pretty hot commodities as well,” said Nyholt.
E&Y partner Richard Crosson told Business in Vancouver the recession forced major mining companies to clean up their balance sheets and that’s now driving deal-making activity.
“The majors came out of 2009 with a significant amount of cash,” Crosson said. “Beyond that the metal prices we’ve seen, particularly in the last eight months, are just building up piles of cash on their balance sheet. So the first thing is companies have capital and the second thing is [they have] confidence.”
According to E&Y’s capital confidence barometer published in April, 61% of companies say credit and capital conditions improved in early 2010, while 47% of companies expected to make an acquisition over the summer compared with 25% in 2009.
PwC expects the pace of deal making to accelerate for the rest of the year and perhaps even outpace the 2007 peak of 1,732 deals worth US$159 billion.
In addition to restructured balance sheets, Crosson said major mining companies are in an environment of low debt costs and have better access to the capital markets than they did a year ago.
That means more deals are likely.
Said Crosson: “They have access to capital in the equity markets and access to capital in the debt markets, and you combine that with confidence and opportunity and people start buying things.”
US$104 billion – global aggregate value of mining deals in 2010 to August 15
49% – the percentage of global mining deals in 2010 that involved one Canadian or American buyer
US$1,289 – the price for an ounce of gold on September 21
40% – the percentage of acquisition targets with a major interest in gold
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