Record Mining Bond Sales to Boost Expansions, M&A (Update1)

Feb. 9 (Bloomberg) -- Record bond sales by global mining companies such as Anglo American Plc and Vale SA have bolstered raw material producers’ war chests for acquisitions, expansions and buybacks as they prepare for sustained global recovery.

Mining companies last year sold $33.3 billion in dollar bonds, the most in 10 years, according to Bloomberg data.

The decline in borrowing costs, surging cash flows and rising metals prices prompted a 28 percent surge in global mining takeovers in the second half of 2009. Vale, the world’s biggest iron-ore supplier which sold $2 billion of bonds in 2009, last month agreed to buy Bunge Ltd.’s fertilizer assets in Brazil for $3.8 billion.

“What we are now into is a growth phase of M&A compared to 2009,” said Tim Goldsmith, global mining leader for PricewaterhouseCoopers LLP based in Melbourne. China and India “want to secure resources and the reality is the best way to do it is to go and buy it,” he said.

This year will be a “massive” year for bonds, Sunny Verghese, chief executive officer of Singapore-based commodity supplier Olam International Ltd., said last month.

Olam raised $1.75 billion last year through a combination of convertible bonds, term loans and equity. It’s seeking to raise more longer-term funding to support acquisition and capital spending plans, Verghese said in an interview last month before the company sold S$250 million ($176 million) of bonds. ArcelorMittal, the world’s biggest steelmaker which sold $1 billion of 30-year bonds in October, said in December it will buy more mines in 2010.

M&A Financing

“Traditionally you’ll see a lot of the bonds being a takeout of M&A financing,” said John Manning, a Sydney-based director of credit strategy at Royal Bank of Scotland Group Plc. Companies may seek short-term bank loans to pay for acquisitions, then replace them with bonds within six months, he said.

The top 15 mining companies including BHP Billiton Ltd. and Rio Tinto Group will generate $20 billion of surplus cash this year, increasing the likelihood of higher dividend payments and more capital spending, according to Citigroup Inc. Investment in mining in Australia, the world’s largest exporter of iron ore and coal, will rebound to record levels by fiscal 2013, according to economic forecaster BIS Shrapnel.

“People spent 2009 in survival mode and now in 2010 it is back to the future,” said Grant Craighead, managing director and co-founder of Sydney-based Stock Resource. “Taking on bonds or other forms of equity are a lower risk way of making capital available for growth.”

BHP rose 0.6 percent to A$39.85 at the close of trade in Sydney. Rio declined 0.3 percent.

Margin Contraction

Barrick Gold Corp. paid a margin of 325 basis points over Treasuries when it sold $250 million of 30-year notes in September 2008, the same month that Lehman Brothers Holdings Inc. collapsed, according to data compiled by Bloomberg. The spread narrowed to 195 basis points when it sold $850 million of similar-maturity bonds in October, the data show.

The value of global mining mergers and acquisitions increased to $41 billion in the six months ended Dec. 31, from $32 billion in the first half, according to Bloomberg data.

To be sure, while mining companies have been “hoarding cash” in the hope of picking up cheap assets, the speedy rebound in commodities after the global financial crisis meant there have been few distressed asset sales, Credit Suisse Group AG said in 2010 outlook report for Australia.

“The chances of grabbing a bargain look slim and as 2010 progresses we expect that the mining companies will come under increasing pressure to increase the returns to shareholders by way of either dividends or share buy-backs,” said Credit Suisse, which expects to see takeovers amongst smaller mining companies, driven by China’s demand for resources.

China Buying

China, the biggest metal consumer, has been buying mining companies to guarantee supply and limit exposure to rising commodity prices. The nation’s $300 billion sovereign wealth fund is considering new investments in resource-related companies after making bets last year on producers in the U.S., Canada and Kazakhstan. Coal India Ltd. said in August it may invest as much as $1.5 billion to acquire mines overseas.

“There is going to be M&A kicking off throughout the course of the year and it is likely to be more the Chinese companies buying into Australian and global companies rather than your BHPs and Rios buying,” said Craig Sainsbury, analyst at Citigroup in Sydney. Mining companies will mainly use equity for acquisitions and spend cash on capital management such as special dividends and buybacks, with the bulk going into project development, he said.

New Loans

Total U.S. bond sales jumped 42 percent to $1.24 trillion in 2009, from $874 billion the previous year. The increase in sales helped companies replace funding from the syndicated loan market, which shrunk by almost a third last year to $463.8 billion of new loans, from $677.4 billion in 2008.

“Corporations are likely to seek more diversified funding sources this side of the credit crunch,” said Ben Byrne, credit analyst at Nomura Australia Ltd. “For companies looking at mergers and acquisitions, we think they will rely less on bridge financing and be more willing to pay up for longer-term bond issuance.”

-- With assistance from Jesse Riseborough in Melbourne. Editors: Keith Gosman, Andrew Hobbs

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Sarah McDonald in Sydney at smcdonald23@bloomberg.net.