BlackRock Inc., which manages $36 billion in natural resources funds, expects the “massive” industry consolidation in mining to continue, driven by low valuations of companies.
“There’s going to be rich pickings for those companies with strong balance sheets when they are looking at M&A,” Evy Hambro, portfolio manager of BlackRock’s $16 billion World Mining Fund, said in an interview. “If you look within the sector, the ones that are the cheapest are the ones that have the financing risk ahead of them.”
Global growth concern sees mining companies trading at 9.35 times their estimated earnings, about half their average in the past five years, according to data from the Bloomberg World Mining Index. The six-biggest miners including Rio Tinto Group will have $144 billion in cash by the end of 2013 and demand for metals will remain strong, Standard Chartered Plc said in August.
“We’re not expecting a doomsday outcome for the miners and especially the bigger companies, which are the potential acquirers,” said Ric Ronge, who helps manage the equivalent of $1.3 billion in stocks, including Rio and BHP Billiton Ltd., at Pengana Global Resources Fund in Melbourne. “They are still generating good cashflow and have very strong balance sheets.”
There were $132 billion of mining deals in the first nine months of the year, up from $79 billion for the same period last year, according to a report today by Ernst & Young LLP. “Jittery” markets caused a slowing of deals in the third quarter, though this quarter could finish strongly because of undervalued targets and acquirers with access to cash, it said.
“It’s highly likely that M&A is going to be a big feature in the market going forward,” Hambro said yesterday in Melbourne. He doesn’t see a change to the trend of the last decade “where you’ve seen massive industry consolidation.”
BlackRock’s World Mining Fund counts Rio, BHP, Vale SA, Freeport-McMoRan Copper & Gold Inc. and Teck Resources Ltd. as its top five holdings.
An indicator of value used by BlackRock is the cost of replacing or building mining assets versus the cost of acquiring them. That measure has dropped recently with mining stocks trading at as low as 70 percent of replacement costs, Hambro said earlier this month, adding that the ratio declined to about 50 percent in the financial crisis of late 2008.
“You’ve got falling earnings, you’ve got compressed multiples, most of mining companies are trading under replacement costs,” Pengana’s Ronge said. “There are definitely opportunities. The market is pretty much ripe for consolidation.”
The gold industry may also see an acceleration of takeovers, Hambro yesterday told reporters on a media call. There were $20 billion of gold takeovers in the second quarter, the most in at least 10 years, according to data compiled by Bloomberg.
Agnico-Eagle Mines Ltd. this month raised its bid for Grayd Resources Corp. to C$230 million ($229 million), while Barrick Gold Corp., the world’s biggest gold company, completed in July a C$7.4 billion takeover of copper producer Equinox Minerals Ltd.