Mining chief executives “gun shy” from the global financial crisis may favor small-to-medium takeovers to expand production rather than building their own mines that take years to develop, said Standard Chartered Plc.
“The only option they have in M&A is to do the $5 billion to $10 billion deals, maybe even less,” Jeremy Gray, Standard Chartered’s global head of equity research for resources, said in an interview from Hong Kong. “That’s the beauty of M&A, you’re locking in cash flow and you don’t have to deal with long-dated projects.”
The collapse of BHP Billiton Ltd.’s $66 billion bid for Rio Tinto Group and Vale SA’s $90 billion offer for Xstrata Plc has discouraged mining companies from mounting similar-sized deals, Gray said. Rio is focused on growth by expansion and acquisitions of a “small-to-moderate” size, UBS AG said this week, citing Chief Executive Officer Tom Albanese.
“Companies very quickly realized those became long drawn out deals that just didn’t work because shareholders of all these different groups on each side thought so highly of their companies they never did the deal,” Gray said Aug. 24.
Mergers and acquisitions have proven to be a faster and almost a cheaper route to building new mines, Gray said in a report. The cost of building a copper mine has more than doubled over the past five years, the report said.
Almost $200 billion worth of projects were postponed or canceled after the collapse of Bearn Stearns Cos. and the global financial crisis in 2008, crimping mine supply, Gray said. Mining company chiefs are too “gun shy to go back out and promise new projects,” he said.
The lack of new supply will produce a “massive move” in the prices of iron ore, coal and copper over the next two years, Gray said.
Copper may rise to $12,000 a metric ton in the next two years as none of the seven largest producers will bring on any new production next year or 2012, the report said. Copper in London closed yesterday at $7,304.50 a ton.
Iron ore prices could go to $200 a ton in 2011 from $147 a ton, Gray said. Coking coal could rally back to record highs of $350 a ton in the near term from $220 a ton, and thermal coal may rise to $150 a ton from $90 a ton. “The era of cheap coal is over,” said Gray.
A lack of new lost-cost iron ore supply over the next two years would keep the market tight after investments “haven’t been made a couple of years ago when we were in the middle of the global financial crisis,” BHP Chief Executive Officer Marius Kloppers said on a media call Aug. 25.
“Essentially Europe and the U.S. are showing very sluggish growth and yet copper has still managed to go up,” said Gray. “So what if Europe and the U.S. show signs of growth - that’s when we have a major problem on our hands, that’s when you’ll see a huge move in commodities.”