JPMorgan Asset Managment’s Neil Gregson, manager of about $6.9 billion in natural-resource assets, says mining companies should chase more takeovers as rising costs force them to slow spending on expansions.
“These companies that are curtailing capex should be, I’m sure they are, more active in making opportunities of the low valuations,” London-based Gregson, who counts Xstrata Plc and Rio Tinto Group among his top holdings, said in an interview in London yesterday. “We’d certainly support a lot more M&A.”
BHP Billiton Ltd. and Rio Tinto, the first and third-biggest mining companies by sales, said last month they’ll ration spending because of escalating costs and waning global economic growth. The Bloomberg World Mining Index has lost 18 percent this year. First Quantum Minerals Ltd., African Minerals Ltd. and London Mining Plc are likely acquisition targets, Jefferies Group Inc. said June 8.
“It’s fairly obvious there’s lots of supply issues on copper and that copper will be a very attractive place to be probably for the next 10 years or more,” said Gregson, a holder of copper producers First Quantum and Freeport-McMoRan Copper & Gold Inc. “There is room for more on the iron-ore side maybe with some of these West African companies.”
African Minerals, which has a market value of 1.2 billion pounds ($1.9 billion), and London Mining both produce the steel-making raw material in Sierra Leone. It declined 1 percent to 355.5 pence at 11:30 a.m. in London. First Quantum, a producer of copper in Africa, has dropped 13 percent this year, valuing it at C$8.3 billion ($8.1 billion). It was unchanged in London today.
“We’ve gone past the point where the capital expenditure required to build new projects now far exceeds what you can go out and buy,” Gregson said, adding he sees more deals. “That is a trade-off where the companies should be much more active.”
Mining companies globally have announced $95 billion of deals in the year to date, up from $75 billion in the same period of 2011, according to data compiled by Bloomberg. Glencore International Plc agreed an all-share takeover of Xstrata in February that values the shares of the target it doesn’t already own at about 19.8 billion pounds.
“M&A activity in the sector should accelerate in 2013 as capex budgets begin to decline and after the Glencore Xstrata merger closes,” Jefferies analysts Christopher Lafemina and Seth Rosenfeld said in a note. “We expect shares of inexpensive miners that have significant low-cost growth potential and miners that are possible M&A targets to outperform.”
“Companies like Glencore, this is the perfect environment for them,” Gregson said. “They are buyers and sellers and I presume that they are very much in the buying mode.”
A drop of as much as 50 percent in mining company valuations since last year, while capital spending costs gained as much as 25 percent has shifted the balance in favor of acquisitions and mergers, Liberum Capital Ltd. analysts said in a note. Spending on new output will drop 19 percent to $103.8 billion next year, according to a Bank of America Corp. report.