Bond market could spur mining M&A

Fairfax Media

MORE CASH: A surge among miners in bond fund raising and debt refinancing, along with stronger markets, is creating a friendlier environment for takeovers and bank lending needed for the deals.

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A surge among miners in bond fund raising and debt refinancing, along with stronger markets, is creating a friendlier environment for takeovers and bank lending needed for the deals.

Mining firms battered by the downturn have bolstered balance sheets in recent weeks with billions of dollars of fund raising in a revived bond market, where investors who believe the worst has been seen are willing to bet on the long-term revival of the sector.

Three of the top diversified mining firms have raised US$13.5 billion on the bond market, and analysts said there was an appetite for more, although interest rates were higher, especially for firms with lower credit ratings.

"The bond market is allowing these groups to extend their debt profile so investors have less concern about a near-term squeeze in liquidity. It's just demonstrating that a bit more stability is coming back into the market, which is positive in terms of downside risk for some of these names," said Richard Horrocks-Taylor, managing director for global mining investment banking at Royal Bank of Canada.

"I think we are going to see an increasing level of M&A activity, but the parties that are doing it are going to be more limited than the ones that were in the market looking at things 12-18 months ago."

Mergers and acquisition activity has been dragging at a low level since metals prices collapsed last year, but deals will likely gain momentum among medium-sized and small firms once a consensus emerges that the bottom has been touched, bankers and analysts said.

The total value of M&A in mining slid by 40 percent to $127 billion last year and the figure for 2009 is seen dropping further, Ernst and Young said in March.

"There could be quite a lot more activity in the M&A market. We don't see necessarily there's going to be huge movement at the larger end, the majors, but we do see that there's a lot of opportunity for consolidation at the mid-tier, junior end of the market," said Judith Mosely, managing director of mining finance at Societie Generale.

"In terms of financial support for that, that's something that bankers like ourselves have a very strong appetite to support."

POUNCE ON ASSETS

One spur for takeovers is firms with stronger balance sheets such as BHP Billiton and ENRC waiting on the sidelines to pounce on distressed assets.

More action is also expected from Asia, where state-owned Chinalco inked a $19.5 billion deal with Rio Tinto to buy interests in key mines and double its equity stake in the overall group.

China sees the slump as a good chance to lock in raw materials supply for the future.

Another source of mergers would be activity among smaller firms to create larger groups better able to survive the downturn.

In one recent deal, African mid-sized platinum producer Aquarius has bulked up by agreeing to buy junior Ridge Mining Plc in an all-share offer valued at 87 million pounds.

One issue putting a brake on deals is lack of clarity over whether this year's recovery in mining equities and metals prices is a bear market rally or a signal that the worst is over.

The UK mining index, which includes most of the major diversified miners, has climbed 30 percent so far this year while key metal copper has rebounded by 45 percent.

"I think people are sitting back looking at assets and companies at the moment, but it's always an issue of 'how low can it go'," said analyst Rebecca O'Dwyer at Investec Securities.

"There's been very little finance for M&A, most of the people are financing M&A with cash they already had on their balance sheets, so we haven't really had to test that yet."

The scarcity of debt finance for mergers could thaw as healthier equity and bond markets bolster confidence.

"For the right groups and the right targets there is finance available, so I think we will start to see some potential debt funding that will come in selectively for some M&A activity," said Horrocks-Taylor.

"Obviously it would be based around operations with a decent cost position, but I think there will be some appetite from some banks to do that. That is a change from where we were maybe three to four months ago."

Apart from possible M&A financing, Mosley said that many banks were also prepared to provide funds to attractive new mines, but there was little activity.

The main obstacle was not a lack of finance, but a shortage of quality projects following a heavy cutback in capital expenditure by hard-pressed mining groups amid weak metals demand.

Another banker who declined to be named said his institution was only financing "brownfield" projects -- new mines nearby existing operations -- not "greenfield" projects that are completely new and have a higher risk profile.

- Reuters